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The Effects of Bankruptcy on Your Credit Score

kariatx from morguefile.comThe purpose of bankruptcy, in many cases, is to help an individual get out of an unsustainable situation. The bankruptcy process may present challenges, including frugal living and the liquidation of assets, but it is generally preferable to the alternative of continuing to live under unmanageable debt. Once a person emerges from bankruptcy, they must begin rebuilding their finances, and their credit score is a crucial factor in that process. Private credit reporting agencies (CRAs) manage the credit score system, and while each one has their own way of recording and reporting information, they must abide by legal requirements regarding retention of negative information and other matters. Repairing a credit score after a bankruptcy is not, strictly speaking, an easy process, but it may not seem so difficult to someone who recently emerged from bankruptcy.

Legal Authority Affecting Credit Reporting Agencies

Three CRAs stand out as the major sources of credit score information: Equifax, Experian, and TransUnion. These three provide most of the credit reports consulted in applications for loans and other financial transactions. The federal Fair Credit Reporting Act (FCRA) regulates how CRAs collect, report, and retain information. It requires them to provide a person with a copy of their credit report once a year, free of charge, upon request. It also prescribes procedures for individuals to dispute negative information in their credit report. A bankruptcy case may seem to stand out as negative information, but it could have some hidden benefits.

Retention of Negative Information

The FCRA prohibits CRAs from retaining negative information, such as collections, defaults, or other delinquencies, for more than seven years. That time period is typically measured from the date of the delinquency. For bankruptcies, the time limit is ten years from the filing date.

Changes to Credit Information After a Bankruptcy

A discharge of debt in bankruptcy does not mean removal of the debt from the credit report. The CRAs will update a person’s credit report, however, to show that a particular debt was included in the bankruptcy proceeding.

In general, a debtor emerging from bankruptcy should expect their credit score to go down. This can result in harsher payment terms for loans or credit cards, or difficulties in leasing an apartment or other property. A discharge of debt in bankruptcy, however, makes a person ineligible for another discharge for as long a eight years. In that sense, a person emerging from bankruptcy offers a certain amount of safety for a lender, although the lender is almost certain to demand a high interest rate.

Rebuilding Credit After Bankruptcy

Debtors coming out of bankruptcy are likely to be inundated with solicitations for “credit repair” and new credit opportunities. They should approach all of these with caution. The best way to rebuild a good credit score is, quite simply, to be responsible and to spend within one’s means. Obtaining new credit is important, but so is staying current on payments

Bankruptcy offers relief to people who find that their debt burden has exceeded their ability to continue paying. While a bankruptcy case may not solve all of a person’s issues, it can give them the opportunity to restructure their debt payments in a more manageable way, pay down debts, and eventually obtain a discharge of certain dischargeable debts. Bankruptcy attorney Devin Sawdayi has represented clients in the Los Angeles and surrounding area in Chapter 7 and Chapter 13 bankruptcy cases since 1997. To schedule a free and confidential consultation to discuss how we can help you, please contact us today online or at (310) 475-9399.

More Blog Posts:

Payroll Debts Ruled Nondischargeable in Chapter 7 Bankruptcy, Los Angeles Bankruptcy Lawyer Blawg, July 23, 2013

California Appeals Court Allows Involuntary Bankruptcy Case to Proceed Where Creditors’ Claims Are State Court Judgments Under Appeal, Los Angeles Bankruptcy Lawyer Blawg, July 2, 2013

Payment of a Debt Prior to Bankruptcy is Not a Fraudulent Transfer, According to Ninth Circuit, Los Angeles Bankruptcy Lawyer Blawg, June 20, 2013

Photo credit: kariatx from morguefile.com.