Myth No. 1: Bankruptcy will ruin your credit forever.
The Truth: Bankruptcy will do damage to your credit in the short term, but it will only stay on your credit report for a maximum of 10 years. After that, you are free and clear of the damages from filing bankruptcy. Additionally, if you continue to practice good financial habits and build credit in the meantime, you can rebuild your credit to be stronger than ever.
Myth No. 2: All bankruptcy information stays on your credit report for 10 years, without exception.
The Truth: Only the public record of your Chapter 7 bankruptcy will last for 10 years. All other bankruptcy references remain on your credit report for 7 years including:
- Trade lines that state “account included in bankruptcy”
- Third-party collection debts, judgments, and tax liens discharged through bankruptcy
- Chapter 13 public record items
Once some of these items start to drop off your credit report, you will begin to see your credit score go up.
Myth No. 3: You will have poor credit if the bankruptcy information stays on your credit report.
The Truth: While you should expect a dramatically lower credit score following a bankruptcy, you can begin to build your credit back up with smart credit management. After four or five years, you may even be able to get back to the good credit score range (700-749). Following bankruptcy, you can immediately begin to build your credit back up by:
- Adding new credit, such as secured credit cards or small installment loans, to offset the negative information on your credit report
- Making on-time payments for all debt, new and old
- Keeping your credit card balances under 30% utilization
Myth No. 4: All bankruptcy debts will be wiped clean from your credit report.
The Truth: While bankruptcy may help you erase or pay off past debts, those accounts will not disappear from your credit report. All bankruptcy-related accounts will remain on your credit report and affect your credit score for seven to 10 years, although their impact will lessen over time.
Also, federal student loans often cannot, in most circumstances, be discharged in bankruptcy, so you may still be on the hook for those.*
Myth No. 5: You cannot get a credit card or loan after bankruptcy.
The Truth: Credit cards are one of the best ways to build credit, and there are options out there for those with a checkered credit history. Secured credit cards, which require an upfront security deposit, have a lower barrier of entry but spend and build credit just like a traditional card. You may even qualify for certain loans that are aimed at building your credit.
Myth No. 6: If You Recklessly Spend Right Before Bankruptcy You Will Not Have to Pay That Money Back.
Being that credit card debt is dissolved in Chapter 7 bankruptcy, in theory, you should be able to embark on a spending spree ahead of time and have all of the debt removed in court…right? This is a common misconception.
The Truth: Courts have ruled that racking up charges ahead of a bankruptcy filing is considered fraud. Moreover, debt that is incurred because of fraud is not discharged. Unfortunately, bankruptcy will not afford you a debt-free shopping spree.
Myth No. 7: You Can Only File for Bankruptcy Once.
The Truth: There is always the chance you may find yourself in a financial rut more than once in your lifetime. Luckily, you can file for bankruptcy more than once should you need to. You can file for Chapter 7 bankruptcy once every eight years. Chapter 13 reorganizations can be filed once every two years, but because it typically takes three to five years to complete a Chapter 13 repayment plan, you can normally file for a new Chapter 13 immediately after your previous reorganization ends.
Nonetheless, just because you can file for another bankruptcy does not mean you should. Multiple bankruptcies do not look good and can deteriorate your credit rating. It is best to only file for an additional bankruptcy if it is absolutely necessary.
So, before taking the big leap into bankruptcy, consult a bankruptcy attorney from Feldmann Nagel Cantafio & Song PLLC and learn the facts about how credit scores treat bankruptcy. You just may be able to minimize the damage and get a jump on re-establishing your credit after filing.
* To get student loans discharged, you must declare Chapter 7 or Chapter 13 bankruptcy and demonstrate that repayment would impose undue hardship on you and your dependents. This must be decided in an adversary proceeding in bankruptcy court. Your creditors may be present to challenge the request.