Category: Bankruptcy

How Does a Discharge of Bankruptcy Affect My Credit?

discharge of bankruptcy

There are a hundred different reasons consumers take the drastic step of declaring bankruptcy: spiraling personal debt, the long-term impacts of a job loss or divorce, or even just to get a fresh start after years of financial issues.

While bankruptcy can help put some distance between you and the ghosts of your financial past, the impact on your credit score (and credit history) isn’t always as cut and dry as some consumers may believe.

A bankruptcy discharge — which legally releases debtors from debt incurred before filing bankruptcy with the court — does not always result in a complete reset and restart of your credit history. That involves some dedicated work to help build new credit after bankruptcy.

The Seven-Year Itch

A Chapter 7 bankruptcy filing may remain on your credit history for 10 years, while a Chapter 13 bankruptcy filing may be listed on your credit history and credit reports for seven years.

Ongoing financial responsibilities such as credit cards balances, medical bills or other debts specifically covered by the discharge will likely report as “included in bankruptcy.” However, any associated history of late payments, heavy utilization or simply having too many active cards and accounts can remain on your account.

Items included in bankruptcy that were associated with the discharge will likely continue to appear on your credit report for up to seven years from the initial date of delinquency.

As a result, creditors won’t necessarily see that your financial history has been “wiped clean” overnight. Despite what you may hope, a bankruptcy filing will not mean an automatic increase in your credit score, if debt has dragged you down in the past.

Lasting Effects of Bankruptcy

Your full credit history will be a factor in any creditor’s decision to offer you a new credit card, a line of credit, or a car loan. A public record of bankruptcy, even one that is fully discharged, can catch the eye if you’re applying to lease an apartment or even putting in a job application, both of which often require credit reports as part of a background check.

Keep in mind that bankruptcy will not release you from all debt obligations. Student loans, back taxes and alimony/child support, which cannot be discharged in bankruptcy, will continue to be a consideration in your credit report.

But, there is hope. Anything you do in your post-bankruptcy future will help rebuild your credit score. Over time, bankruptcy records shown on your credit report will become less and less important. Many creditors are willing to give post-bankruptcy consumers a second chance with a new credit card (often a secured card), though chances are you’ll be paying a higher interest rate or be given less access to credit until your credit score increases.

Don’t wait until it’s too late. Seek out professional credit repair before the lasting effects of bankruptcy loom over your finances. You can also carry on the conversation on our social media platforms. Like and follow us on Facebook and leave us a tweet on Twitter.

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Bankruptcy: To File or Not to File

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Disclaimer: As trusted leaders in credit repair, Lexington Law Firm is a consumer advocacy firm with a focus on helping consumers repair their credit. Lexington Law does not practice other specific areas of law, and any information provided on this blog is strictly for informational purposes. Please consult with an attorney in your state to determine what may be applicable to your individual situation.

Bankruptcy. A creditor detests it, until in need of its protection. A debtor avoids it, until it’s often too late. It is so easy to avoid planning for a bankruptcy until you are suddenly faced with that difficult choice due to your credit situation. For in bankruptcy, judgment day — in a strictly legal sense — may literally arrive ever so unpredictably as the result of a fleeting former lifestyle. To help you in your journey, this article will address some important factors to consider in determining whether or not bankruptcy would be applicable to you.

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How To Repair Your Credit After Bankruptcy

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Filing for bankruptcy could lead to a significant drop in your credit score, but if you act properly once it’s all over, it doesn’t have to stay that way. After you are discharged from bankruptcy, there are a few measures you should take to help bring that score back up.

 

How bankruptcy affects a credit score:

According to FICO, bankruptcy can lower your score by as much as 240 points. The drop is so large because FICO categorizes bankruptcy under payment history. Payment history is also FICO’s most important factor in determining a credit score.

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Bankruptcy: To File or Not to File?

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Bankruptcy. A creditor detests it, until in need of its protection. A debtor avoids it, until often too late. In a way, bankruptcy is much like facing death. It is so easy to avoid planning for “what dreams may come” until one unexpectedly stands at the threshold of passing “gentl[y] into that good night.” Yet, at that precise moment, all the doubts, fears, and uncertainties that one may hold seem to concentrate into an amorphous yet densely heavy fog of impending consequence. For in bankruptcy, judgment day—in a strictly legal sense—may literally arrive ever so unpredictably upon the death of a fleeting former lifestyle.

Wouldn’t it be wonderful if you had a plan for the unexpected uncertainties of life, specifically financial uncertainties? Whether you are a business owner, an entrepreneur, a board member, an officer, a shareholder, or a plain vanilla consumer debtor, the time to learn about bankruptcy and create a plan for such financial uncertainties is now; not when peering down the precipice of misfortune. To help you in your journey, this article will address some important factors to consider in determining whether or when to pull the trigger and file bankruptcy. Just remember to aim the barrel at the debts; not the debtor.

Of course, the precursor to knowing when to file is knowing which chapter of the bankruptcy code you wish to utilize. This article is designed to provide factors that specifically apply to Chapter 7 filings, although they may be equally applicable to other chapters.

How do I know that it is time to file bankruptcy?

The key to knowing when the timing is right depends on your overall goals regarding your core purpose for filing bankruptcy. Some debtors merely want peace of mind, while others want a particular outcome like quashing an existing garnishment. Regardless, the following factors should help you determine if the time is right for you:

Exemption Considerations:

Many debtors contemplating bankruptcy are often “judgment proof.” Are you? In a general sense, this term means that all property in a debtor’s possession is exempt from the collection efforts of a creditor or debt collector attempting to seize the property to satisfy a debt. Some example of judgment proof debtors are persons that live entirely on exempt sources of income like social security or SSI. Other examples include unemployed individuals with possessions that are exempt from seizure under a federal or state statutory exemption such as household goods, qualified retirement accounts, tools of the trade, or a specific amount of equity in a home or an automobile. As state exemption laws often vary significantly, anyone considering filing bankruptcy should contact a local attorney to discuss his or her potential case in detail. Ultimately, an individual that is judgment proof is already protected by the law and generally does not have a need to file bankruptcy. Then again, some judgment proof debtors may still want to file bankruptcy for the sole purpose of providing peace of mind.

Employment Considerations:

Are you currently unemployed or underemployed? If you are unemployed, consider the following: (1) there are generally no wages eligible for a creditor or debt collector to garnish; (2) you will likely continue to accrue debt until you are employed; (3) potential employers will often look unfavorably upon a recent bankruptcy filing if discovered within the application process; and (4) the Chapter 7 means test considers your actual monthly wages for the prior six months before a petition is filed.

The first factor indicates that it is often more difficult for a creditor or debt collector to collect during a period of unemployment, even in the event of receiving unemployment benefits. The second and third factors indicate that you seriously want to consider the timing of filing bankruptcy, as the fourth factor indicates that you usually have a few months to acclimate to your new job and still qualify to file a Chapter 7 petition. Thus, it’s often wise to wait to file bankruptcy until you are in your second or third month of employment at a new job.

If you are underemployed, consider the impact that a bankruptcy filing may have in the application process while looking for better employment. Although federal law prohibits a government or private employer from firing you if you declare bankruptcy, there is often little protection against a potential employer considering your bankruptcy in their decision-making process regarding whether or not to offer you a job.

Consequently, long term considerations regarding employment should be taken seriously when contemplating potential short term benefits offered by bankruptcy.

Student Loan Considerations:

Are you thinking about going to graduate school? Consider the impact that bankruptcy may have on acquiring additional student loans. Although a prior bankruptcy generally should not affect whether you may receive a new federal loan or grant, it will almost definitely affect your ability to qualify for a private loan or a federal PLUS loan, which loans are often needed for graduate studies.

Medical Considerations:

One of the top reasons for filing a consumer bankruptcy is medical bills. Many debtors feel compelled to declare bankruptcy upon receiving a demand to pay past due medical bills. Many debtors, however, fail to take into consideration whether or not they have completed their medical treatments. It makes little sense to declare bankruptcy for $100,000 in outstanding medical bills today when you are still receiving treatments that will amount to another $50,000 in medical costs tomorrow. Unless, there is an active garnishment that is making it impossible to pay for necessities, it is often best to wait until you have fully completed your medical treatments prior to filing bankruptcy.

Also, many debtors—particularly those in rural communities—often do not fully consider the effect of discharging medical debt owed to the sole local doctor or small group of local doctors that service the community. How will including these debts in bankruptcy affect that important doctor-patient relationship? Is there a way to negotiate a series of payments? While no one likes the idea of a rural doctor refusing to service a patient based on that patient’s prior bankruptcy; it could happen. While there may be matters to litigate in such a situation, the reality is that many debtors don’t have the resources, energy, or emotional strength to endure an absence of medical treatment until an outcome is reached by way of law suit or settlement; an event that could take years. Then again, relocation may be the solution.

Future Credit Considerations:

Your credit score is quickly becoming one of the most important factors in your day to day life. It affects whether you can: (1) rent or own a home, condominium, or apartment: (2) lease or purchase an automobile; (3) afford monthly payments based on the available interest rate; (4) obtain employment (i.e., many employers now check your credit score prior to making a hiring decision regarding your application of employment); (5) whether you are eligible for a promotion if serving in the military; 6) whether you may work in a particular industry (e.g., the financial sector); (7) whether you qualify for financing in department stores; (8) whether you qualify for consumer-friendly credit cards (e.g., the ones that give you rewards and cashback options); (9) whether you can qualify for certain student loans to finance higher education; (10) whether you can qualify to help a dependent qualify for student loans, etc.

Declaring bankruptcy—the simple act of merely filing a bankruptcy petition—may remain on your credit reports for up to 10 years! This does not require that you receive a discharge in a bankruptcy; only that you file a bankruptcy petition. What other decision can have such a negative consequence on so many important life decisions over a 10 year time frame? Consequently, it is imperative to have a plan to know whether and when to file. With that said, bankruptcy may not negatively impact your score as much as anticipated if your score is already very low due to frequent missed payments, collections, and judgments.

For those individuals who are already suffering the negative effects of having filed for bankruptcy, Lexington Law Firm may be able to assist by ensuring that you have a fair and accurate credit profile.

Immigration Status Considerations:

Although legal immigrants and even undocumented immigrants may technically file bankruptcy as long as they have a valid social security number or an individual taxpayer identification number (ITIN), they should recognize that all statements made within the petition are filed under penalty of perjury. In addition, all filings are readily accessible by the United States Department of Justice. Consequently, any immigrant should consult with an experienced immigration attorney prior to filing bankruptcy.

Standard of Living and Lease Agreement Considerations:

Remember that a Chapter 7 bankruptcy, in particular, only protects exempt assets. All other possessions are subject to sale by trustee. How will this affect your standard of living? Is there a way to handle a specific asset or group of assets to avoid having to declare bankruptcy and potentially forfeit all non-exempt property? This is a very important question to answer prior to making a final decision on whether and when to file bankruptcy.

In addition, it is important to consider the effects that bankruptcy may have on your ability to enter into a new lease agreement with a potential landlord after having recently declared bankruptcy. Landlords may evaluate your ability to pay the lease prior to agreeing to allow you to rent the space. This means that you may be denied an apartment if the landlord determines that you do not have the ability to pay which may include information regarding a recently filed bankruptcy petition. Consequently, it is wise, if possible, to file bankruptcy after having already entered into a lease agreement with a landlord. By doing so, you can generally exclude the lease agreement from the bankruptcy by informing the court and by continuing to make regular monthly payments to the landlord as initially agreed upon. Again, it is essential to discuss this option in detail with a local attorney prior to filing.

Ultimately, only you can decide whether or when to file bankruptcy; so make it an informed decision:

So, should you file bankruptcy? If so, when should you file? That will depend largely on what your overall objectives are and what your current life situation is. Are you judgement proof? Are your assets exempt from collection efforts? Are you unemployed or underemployed? Are you considering requesting private or PLUS student loans in the near future? Do you have ongoing medical needs? How will bankruptcy impact your standard of living and your ability to maintain or enter into a new lease agreement? Although bankruptcy was designed to provide the unfortunate debtor with a “fresh start,” the timing of filing bankruptcy is critical to the ultimate success of receiving a fresh start. Although uncertainty is a part of life, the decision to file bankruptcy is quite similar to pulling a trigger in that it is nearly impossible to recall discharged ammunition; the effects of which have serious and reverberating consequences.

In the end, however, bankruptcy may be the only option to allow you to move forward financially. That is why it is essential to have a personal financial plan regarding how and when you will know that bankruptcy is the right decision. When that day arrives, make sure that the timing is right to ensure that your “fresh start” is what you expected it to be.

Mark Andrus is an associate attorney for Lexington Law Firm. He received his BA in English with a minor in Business Management at Brigham Young University and his Juris Doctorate from Santa Clara University. Mr. Andrus has served as a judicial extern for the Honorable Arthur Weissbrodt of the United States Bankruptcy Court for the Northern District of California and as a technical editor for the Santa Clara Law Review. He currently serves on the Utah State Bar Association’s Pro Bono Committee for the Third District. His areas of practice include consumer, bankruptcy, and family law litigation and corporate compliance with federal and state consumer laws. Mr. Andrus is licensed to practice law in Utah, California, Arizona, Montana, New Hampshire and Arkansas.

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North Carolina Bankruptcy by County

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In a previous post we took a look at how bankruptcy rates were more common in some regions than others. The reasons pointing to bankruptcy varied, but economic factors were one issue that played a major role. For example, southern states have a greater prevalence of bankruptcy, while more poverty-stricken areas also see increased rates of bankruptcy.

And while looking at the nation as a whole is important for putting this fiscal condition into perspective, we felt we could go a bit deeper and focus more specifically on states. In this piece, we’ll take a look at North Carolina.

Not the worst
North Carolina is not at the bottom of the pile when it comes to bankruptcy-ridden states. In fact, it fares better than many, with an average of 16.71 bankruptcy cases per 10,000 residents. This doesn’t put the state anywhere near the top. However, there is no denying that bankruptcy exists, and with a steadily growing population, which is currently at almost 10 million people, the state of North Carolina should be aware of which areas are being hit by bankruptcy the hardest.

North Carolina Bankruptcy Top 10 Map

The best way to do this is to break the state down by county, providing the 10 best and 10 worst pertaining to bankruptcy rates. As you can see, Northampton is far and away being hit the hardest by bankruptcy issues. Averaging 135.80 out of 10,000 residents, this county is far above the number two county, Granville, which has 78.42. From there the gap gets smaller and more gradual.

At the other end of the scope, you’ll see Washington county takes the top spot with only 3.14 bankruptcy cases out of 10,000, just underneath Hyde County with 3.50. However, it is important to note that not all bankruptcy filings are the same, as no two financial situations are alike. So while these numbers display how many bankruptcy cases there have been, specifics are needed to further investigate what these numbers actually mean. On the other hand, concentrated cases certainly demonstrate a trend, which is alarming to many financial professionals.

See the complete North Carolina county list here:North Carolina Bankruptcy Rank Chart

What to know about bankruptcy

Filing for bankruptcy can help individuals remove debt they are unable to pay back. While there are many causes for bankruptcy, it is important to know that filing for bankruptcy is not the only option for eliminating debt. Only when individuals or businesses reach a financial position without options is bankruptcy turned to.

That being said, the process can certainly assist individuals getting back on their feet. While it stays on a credit report for some time and can make it difficult to attain loans or large amounts of credit for some time as well, it can also help alleviate a dire situation.

There are also different types of bankruptcy, as it is not a one-size-fits-all process. And which bankruptcy type a consumer files (often Chapter 7 or 13) can dictate how long it stays on a credit history. But in the end, bankruptcy removes debt and allows people to move on with their lives.

Methodology

County bankruptcy rates are from March 31, 2014 to March 31, 2015. Those data were sourced from a database of bankruptcy filings offered by the U.S. Federal Courts (uscourts.gov). We included all bankruptcies, both by businesses and individuals, including Chapter 7, 11, and 13 filings.

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