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The relationship between bankruptcy and your credit score

On Behalf of | Jul 31, 2022 | What Bankruptcy Can Do |

Filing for bankruptcy may result in losing your car, Tennessee home or other assets, and taking such a step may also have a significant impact on your credit score. Typically, scores go down after seeking Chapter 7 or Chapter 13 protection from creditors. However, depending on the circumstances of your case, there is a chance that your credit score may actually increase.

Filing for bankruptcy can keep secured creditors at bay

When you file for bankruptcy, you will likely receive a stay of creditor collection activities. This means that you are not subject to lawsuits, repossessions or other actions that could have a negative impact on your credit score and creditworthiness. Obtaining such a stay may provide you with the leverage needed to renegotiate the terms of auto, mortgage or other secured debts. Ultimately, you may be able to get these accounts back to current, and in some cases, you may be able to eliminate negative equity, which can reduce future payments and make them easier to pay.

Unsecured debts may be wholly eliminated

At the end of a bankruptcy proceeding, unsecured debts may be wiped away in their entirety. This will likely reduce your debt-to-income (DTI) ratio as well as get rid of any payments that are more than 30 days past due. If you had large credit card balances, your credit utilization rate will likely drop after a bankruptcy case ends, which may further help to increase your credit score.

Expect to spend two years rebuilding your credit

It generally takes about two years to fully rebuild your credit after your bankruptcy case ends. This is in spite of the fact that a Chapter 7 bankruptcy stays on your credit report for a decade while a Chapter 13 case stays on your credit report for seven years.

Filing for bankruptcy may be ideal if you don’t think that you will be able to get out of debt in a timely manner. It can also be beneficial if you want to eliminate debt without necessarily losing assets such as a home or car.