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How Bankruptcy Affects Your Credit Score

Most people are terrified that their credit will be destroyed if they file bankruptcy. This fortunately is not true. Most people who file bankruptcy have a credit score somewhere in the mid 500’s. The report has many accounts that are in collection and the only chance for these people to clean the slate is to file a Chapter 7 or Chapter 13 bankruptcy and wipe out the debts. Based on many years experience a client whose FICO score is in the mid 500’s will see a relatively quick boost in the score within a year of the filing. The credit report service that we use at Broumas Law Group LLC has a feature that estimates for our bankruptcy clients what the FICO score will be one  year after the Chapter 7 or Chapter 13 bankruptcy is filed. Surprisingly almost every client sees a 30 to 100 FICO score improvement based on that report.

There are a few clients who arrive at our door with a 700 plus FICO score. These clients tend to come from one of two different groups. The first group, consisting of clients who have suffered a catastrophic life event,  loss of a high paying job, illness, business failure or similar sudden tragedy. These clients are just in a bad place and will most likely see a real loss in their FICO credit score in the short term. The question for people in this group is what the prospect of a quick recovery is before all of their loans are delinquent and start reporting negatively.

As unfortunate as their situation is in many cases a poor credit score is just around the corner. Depending on the magnitude of their obligations it is most likely going to be impossible for these clients to maintain a great credit score. The prospect of filing even if there is a short term drop in the score is still better long term since they should recuperate faster after filing a Chapter 7 or Chapter 13 bankruptcy.

The second groups of clients with a 700 plus FICO score are the clients that are over extended and keep using the credit cards and credit lines to stay current. They often tell me they are “robbing Peter to pay Paul”. For these clients the credit score should be in the 500’s but they desperately try to maintain their credit by becoming more and more in debt. The solution for these clients is simple: they have to cut the credit card cycle, stop buying necessaries like food and gasoline on credit and file bankruptcy. They need to get on a cash basis. I tell them if you cannot afford to pay for it then it does not make much sense to pay 24% more when you add the interest to the price.

Although bankruptcy will stay on your record for 10 years, bad credit stays there for 7. If it takes you 5 years to pay off the bill and it stops reporting 7 years after that it will probably be there longer than the bankruptcy.

Clients report a dramatic improvement in their ability to buy cars within months of a filing with a reasonable interest rate. Buying a home, which is impossible if you have many delinquent accounts, is very realistic 3 years after the bankruptcy is over. If you have questions about the effect of bankruptcy on your credit an experience Maryland bankruptcy attorney can help you.

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