People often believe that filing for bankruptcy will ruin their credit for the rest of their life. That is not true. There is a lot of misinformation about how bankruptcy will affect a person’s credit rating or credit score. Under Fair Credit Reporting Act, the bankruptcy case will appear on your credit report for ten years. Accounts included in bankruptcy will be listed as “Included in Bankruptcy” for seven years.

However, the impact of these items on your credit report have a temporary impact. The effect of any negative item on your credit report will diminish over time. In the short run, bankruptcy will significantly lower your credit score and prevent you from getting credit on favorable terms. However, about two years after filing for bankruptcy, most consumers are able to seek credit on normal terms. This is because they have discharged most or all of their debt, and are now living on a budget they can afford.

Filing bankruptcy has serious and long lasting consequences, including how it affects your credit, your credit score, and your credit rating. However, the affect on your credit score is temporary and is often the lesser of two evils when compared to defaulting on accounts. This article discusses the various ways in which filing for bankruptcy can affect your credit.

Public Records.

When you file a petition for bankruptcy, it is a public record, that can be accessed by the court, by creditors, and by companies that compile public records information. When you obtain a discharge from the bankruptcy judge, it also becomes a public record. The discharge and any orders or judgments that arise out of the bankruptcy case will appear in court records, and may appear in online or electronic records. The judgment will also appear on your credit reports for ten years.

Accounts Discharged in Bankruptcy.

Accounts that are included in bankruptcy must be updated by the creditors to be reported as zero balance, and zero past due. If the account was in arrears prior to the filing of the bankruptcy, or if it was charge off, that information may or may not continue to appear. Any derogatory information, including “Included in Bankruptcy” will appear on your credit report for seven years. You should check your credit reports regularly to ensure that the accounts are being reported accurately.

Will I Qualify for Credit after Bankruptcy.

Yes. In fact, when you get your discharge from the bankruptcy court, you will probably start receiving new credit applications almost immediately. This is because you will have little or no debt, and because you will not be able to discharge new debt for a significant period of time. However, you should be very cautious about accepting this initial wave of credit offers. These offers will often be on unfavorable terms, including low credit limits, high interest rates, and other charges and fees.

Within about two years, your credit rating will begin to climb back up, and the bankruptcy itself will be less of a factor in your credit score than your credit history for the last two years. If you faithfully pay your bills on time (especially any mortgage payments), you can expect your credit score to reflect that, and you will likely qualify for credit on market terms, as opposed to paying a penalty just because you filed for bankruptcy.

Comparison to Not Filing for Bankruptcy.

While the effect of filing bankruptcy is real and significant, it must be weighed against the outcome of not filing. If you decide not to file for bankruptcy, you must continue paying your creditors. If you fail to pay your obligations on time, one or more of these accounts may be reported to the credit reporting agencies as delinquent, or as a charge off. The accounts may also be assigned to a collection agency, which will result in a second derogatory account or “tradeline” appearing on your credit. If the creditor decides to sue you, that lawsuit may become a judgment, which like the bankruptcy court judgment, may remain on your credit report for ten years.

Conclusion.

Many interested parties may wish you to believe that if you file bankruptcy, you will never qualify for credit again. That is not true. Bankruptcy is a significant life event, and will have a major impact on your credit for a significant amount of time. However, it will not ruin you, and you will be able to obtain credit again on reasonable terms. Additionally, the alternative to bankruptcy may have just as negative and long-lasting effect.

This information is presented by the Bankruptcy Practice Group of Baxter & Baxter, LLP. The Portland, Oregon bankruptcy attorneys and Vancouver WA bankruptcy lawyers of the Bankruptcy Practice Group represent individuals in Chapter 7 and Chapter 13 bankruptcies. We offer a free initial phone consultation. We can stop collection calls from debt collectors and home foreclosures. We can advise consumers whether to file for bankruptcy, and what form of bankruptcy to file.

The most recent employment figures from the federal Bureau of Labor Statistics (BLS) indicate that the recession is continuing to have a direct impact upon employment. “Total nonfarm payroll employment declined by 131,000 in July, and the unemployment rate was unchanged at 9.5 percent, the U.S. Bureau of Labor Statistics reported today. Federal government employment fell, as 143,000 temporary workers hired for the decennial census completed their work.” Private-sector payroll employment increased by 71,000. Thus, the number of unemployed nationally has increased. The Bureau of Labor statistics reported that the June 2010 unemployment rate for Oregon held steady at 10.5 percent. The Bureau of Labor statistics reported that the June 2010 unemployment rate for Oregon held steady at 8.9 percent.

This is coupled with a still teetering housing market. Realtytrac reports that “a total of 97,123 U.S. properties received default notices in July, a 1 percent increase from the previous month but a 28 percent decrease from July 2009.” Realtytrac also noted that “Default notices in July were down 32 percent from their peak of 142,064 in April 2009.” Additionally, Realtytrac reported “Foreclosure auctions were scheduled for the first time on a total of 135,248 U.S. properties in July, an increase of 2 percent from the previous month but a decrease of 2 percent from July 2009. Scheduled auctions in July were down 14 percent from their peak of 158,105 in March 2010. Lenders foreclosed on 92,858 U.S. properties in July, a 9 percent increase from the previous month and a 6 percent increase from July 2009.”

This dire economic data has caused some to speculate that the economy is facing a “double dip” recession, that is, a second drop in economic growth, and the subsequent weakening in job growth and increase in unemployment. It seems likely that this second economic dip will force more families that are already hanging on by a thread so to speak into financial calamity. Many of these people will consider bankruptcy as an option. It should be noted that unemployment can significantly affect the type of bankruptcy that a consumer can file, and the overall outcome of that bankruptcy proceeding.

Chapter 7 liquidation is the most common type of bankruptcy. Since significant changes to the bankruptcy law went into effect, it has been more difficult to qualify for Chapter 7 bankruptcy. This is due to a provision of the bankruptcy code called “means testing.” This essentially looks at a household’s income and liabilities and determines whether the debtor falls below certain paramaters in order to qualify for Chapter 7 liquidation. On the other hand, many people seek Chapter 13 wage earner repayment plans. In order to qualify for this type of plan, the debtor must be employed, and demonstrate to the Court and Trustee that he or she can make the monthly payments under the plan. In between Chapter 13 repayment and Chapter 7 liquidation is a potential no-man’s land, in which the debtor previously earned too much income to qualify for a Chapter 7, but no longer qualifies for a Chapter 13 repayment plan due to unemployment. A good bankruptcy attorney can assist debtors in pre-petition planning to ensure that the proper type of case is filed. This may involve reviewing income, assets and liabilities also referred to as “means testing” or reconsidering the timing of filing a petition.

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