Bankruptcy and the Effects on your Credit Score
Filing for Bankruptcy can be an extremely painful decision. People who normally file for chapter 7 or 13 bankruptcy are at the brink of no return and file it as a last resort. Though filing for bankruptcy does offer many protection benefits, it also has damaging personal effects. As the economy continues to struggle, more and more people will continue to file for bankruptcy in order to protect their livelihood.
In the past year alone, more than half a million Americans filed for Bankruptcy. However to understand the seriousness of the situation, we first must understand what bankruptcy is. Filing for bankruptcy is when you are running a business or borrow money but you owe so debt to creditors that you are unable to pay them back. At this point the debt seems to be unmanageable and you may think about filing for bankruptcy. A majority of Americans face Bankruptcy due to two major reasons: income reduction and/or loss of a primary job. Filing for bankruptcy will force you to sell back assets to pay the creditors as much as possible while keeping some basic assets that are needed to survive. The assets that you keep vary from state to state.
What is really frightening is the huge drop in credit score that bankruptcy filers face. Most people who file for chapter bankruptcy have strong financial histories and often have high credit scores. These people often spend within their means and have always had the ability to pay creditors back on time. Filing for bankruptcy can easily lower your credit score from an outstanding 780 to a mere 540. According to Consumer Affairs, that is an outstanding drop of nearly 240 points. This can make your credit score from highly desirable to almost undesirable. The lower the original credit score, the lower the drop will be for you.
Chapter 13 Bankruptcy
Filing for chapter 13 bankruptcy means you can keep the items that you own but you are forced to come up with income to pay back creditors within a three to five year period. A chapter 13 bankruptcy stays on your credit score for about seven years. Although chapter 13 bankruptcy is less common than chapter 7, the number of individuals filing for it every year has increased significantly.
Chapter 7 Bankruptcy
Filing for chapter 7 bankruptcy means the assets that are in the payment plan are handed over to the creditors. Often the rest of the debt is forgiven after the assets are handed over. However the filing will be able to keep some of the assets depending on the law of the state. Different courts have different exemptions. For example individuals who reside in Florida are able to protect their homes during a chapter 7 bankruptcy. This protection allows individuals to try and get back on their feet. Filing for chapter 7 bankruptcy will have a 10 year impact on your credit score report.
In some states, people’s retirement accounts can be protected up to one million dollars. This prevents creditors from taking money from your retirement accounts in order to pay back the difference owed. In other cases college saving plans and life insurance policies can also be exempt as well. These exemptions vary from state and state. Often people who file for bankruptcy should obtain advice from a bankruptcy attorney in order to insure that the transaction occurs smoothly and the maximum protection is given.
Understand How Bankruptcy Works To Protect Your Credit Score
Filing for bankruptcy can be a positive and negative decision. It protects some of your assets but has huge damaging impacts on your credit score which could last for years. Many lenders will offer very high interest rates to individuals who have filed for bankruptcy. Simply understand how the bankruptcy system works is the first step to protecting your credit score. For more information about bankruptcy and the effects it has on your credit, please sign up below.