For many people, the biggest thing keeping them from talking to a bankruptcy attorney is the fear of what it will do to their credit scores. There's no denying a bankruptcy will hurt your ability to get financing. But there are strategies that your attorney can help you use to avoid the need for bankruptcy, or to reduce its effect once it is filed.
In this blog post, I will discuss credit saving options available before filing for bankruptcy. I will review debt consolidation strategies and other ways to avoid a bankruptcy filing. I will explain which strategies can be used in connection with a bankruptcy and what you can do to save your credit score.
No one wants to have to file for bankruptcy. You may be understandably worried about what doing so will do to your credit, and your ability to get financing in the future. Before diving into your options, be sure you understand what bankruptcy will do to your credit score.
A Chapter 7 bankruptcy discharges all an individual's eligible debt within a few months of filing, allowing it to drop off your credit score after approximately 7 years. However, the Chapter 7 bankruptcy itself stays on your credit report for up to 10 years.
A Chapter 13 bankruptcy creates a payment plan that pays off eligible debts over 3 to 5 years. The bankruptcy itself stays on your credit report for up to 7 years. However, because the debts are paid off over time, they may still show up a few years longer.
Whichever bankruptcy option you qualify for, you can expect to take a hit of 160 to 200 points from the bankruptcy itself. However, in many cases, people who file for bankruptcy see their credit score improveafter filing. By the time bankruptcy becomes an option, these individuals often have a very poor credit score to begin with. Once the bankruptcy proceedings start, the reports of delinquencies and past-due balances end. That is why, in some cases, filing for bankruptcy can actually save your credit score.
The good news is that debt problems don't always have to lead to bankruptcy. There are many non-bankruptcy strategies available to debtors, depending on their personal and financial circumstances. Before filing for bankruptcy, it is a good idea to meet with a bankruptcy attorney and see if you can save your credit score another way. As professionals in the areas of debt and its legal effects, bankruptcy attorneys are often best able to help you evaluate your options and choose a strategy that will work for you.
Sometimes, a challenging financial situation is the result uncontrolled spending. By looking at where you money goes each month, you may be able to reduce your expenses and establish a budget that will keep you out of bankruptcy and save your credit score.
When there is no more fat to trim, you may be able to find new sources of money to pay off your debt. You may be able to take on a second job or make money from a hobby to add to the family budget. Or you may be able to sell a collection or valuable asset to pay down your debt and avoid filing for bankruptcy. Keep in mind that under a Chapter 7 bankruptcy, you will be expected to sell all unprotected assets anyway. By choosing to sell some things, you may be saving others.
In some cases, a collections defense lawyer or bankruptcy attorney may be able to negotiate better terms with your creditors. You may be able to resolve debts for a percentage of what is owed and stop interest from piling up. In other cases, you may be able to negotiate easier payment terms by spreading installment payments out over time.
If you are juggling a number of credit cards, medical bills, and other debts, you may be able to bring payments down and avoid late fees through consolidation and debt management. Debt consolidation involves taking out a new, large debt with a relatively low interest rate, like a home equity loan, to pay off several smaller debts with higher interest rates. Under debt management, you pay one monthly payment to a debt management company which then distributes the payment out to your various creditors.
Each of these non-bankruptcy strategies are designed to resolve delinquent debt, stop collections efforts, and help you save your credit score. But they can sometimes mean you will pay more money in the long run. In those cases, or when your credit score is already damaged because of a history of poor credit decisions, bankruptcy may be the best choice.
If a Chapter 7 or Chapter 13 bankruptcy is best in your circumstances, you will want to start right away to rebuild your credit and save your credit score.
Pull your free credit report a few months after your bankruptcy is filed, and again after your Chapter 13 bankruptcy payment plan is completed. Be sure the discharged debts show a balance of $0 and are no longer listed as delinquent. If they are, talk to the creditor or your attorney to correct the error.
It can be tempting not to open any new credit accounts after a bankruptcy. But no credit is sometimes as difficult to deal with as a bad credit score. Use secured credit cards or other forms of easy-to-get credit to establish a new line of credit. Then keep up with the payments to make sure the credit you do build is good. At the same time, avoid opening up too many new lines of credit and falling back into old habits.
If you have a mortgage or other long-term loan that continued through the bankruptcy, keep it. You can use this to increase the length of your credit history (a factor not generally affected by filing for bankruptcy) and save your credit score.
Bankruptcy can reset your debts, but it won't solve all your financial problems. Moving forward after filing for bankruptcy, be certain to create and stick to a budget, so you don't start developing new debt faster than you can pay it off.
There is no doubt a bankruptcy will negatively affect your credit score. But those negative effects fade over time. By building good credit in the present you can decrease the impact of a bankruptcy in your past.
At John A. Steinberger & Associates, P.C., we know that not every debt problem requires a bankruptcy. We are a full-service bankruptcy law firm in Southeast MI, serving debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We carefully evaluate our clients' circumstances, and discuss which strategies will be best for them, whether or not they include bankruptcy. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.