5 Myths About Bankruptcy and Your Credit
Our society is driven by credit. The better your score, the greater your access to housing and some types of employment. You also benefit from favorable interest rates and repayment terms on any loans or credit cards.
This is why so many people resist filing bankruptcy, even when they’re months in arrears and their mortgage lender is getting ready to foreclose (which means that their credit is not in good shape anyway). They worry that the moment they contact a bankruptcy attorney, their dreams of homeownership and other goals made possible by a positive credit rating will disappear forever.
It isn’t true, nor are several other assumptions about bankruptcy and credit in Michigan. In this blog, we’ll present five of the most common myths and the truth in each case.
Myth #1: Bankruptcy will ruin your credit permanently
It’s true that bankruptcy does extensive damage to your credit in the short term, but it only stays on your credit report for up to 10 years. During that time, you can practice strong financial habits that produce a great score once the filing disappears from the public record.
Myth #2: You can’t get a loan or credit card with a bankruptcy on your record
Credit challenges are to be expected while your bankruptcy case is active and even for a while after discharge, but very few people fail to receive new credit during the years that the bankruptcy remains on their record.
In the beginning, you can apply for a secured credit card, store card, or car loan, all of which are easier to qualify for and will build credit. You will likely be charged a higher interest rate in the beginning, but using these products wisely can result in better terms later on.
Myth #3: Good credit before bankruptcy will result in a higher post-bankruptcy score
According to Debt.org, the higher your original score, the more it will drop after you file bankruptcy. Someone with an excellent score of 780 can lose anywhere between 200 and 240 points while those with a score of 680 will lose 130 to 150 points. In either case, lenders will regard you as a risky borrower and may only extend secured credit.
Myth #4: Your credit score will be poor as long as your report contains bankruptcy information
While bankruptcy will cause your score to drop dramatically at first, there are ways that you can build it back up after your discharge. They include:
- Paying your bills as they come due
- Keeping credit card balances under 30% of their limit
- Adding small amounts of new credit to offset the negative information from the bankruptcy
Myth #5: All bankruptcies remain on your credit for 10 years
This one is true only with Chapter 7 bankruptcies. Chapter 13 and other bankruptcy references disappear after seven years. These references include:
- Items discharged through bankruptcy, such as collection actions, tax liens, and judgments
- Trade lines that reference accounts included in bankruptcy.
As these references disappear, your credit score will climb.
Contact the Bankruptcy Attorney Team at Maxwell Dunn PLC
When you are having financial problems, your credit score may already be damaged due to missed payments and collection actions. By filing bankruptcy in Michigan, you can put these challenges behind you and take steps to enjoy a better credit rating than ever. To meet with a bankruptcy attorney and learn more about your options, contact Maxwell Dunn PLC.