As a financial/bankruptcy attorney, I get asked all the time: What will a bankruptcy do to my credit?

My answer is always the same: “The same thing as not paying your bills.”

I am not a credit reporting agency. I do not know what mathematical equation the credit reporting institutions use to determine the score. Does anyone really know? I can’t tell you how your credit score will change as the result of not paying bills, charge-offs, debt forgiveness, or bankruptcy. However, I can tell you why sometimes filing a bankruptcy can be the best option for your credit in the long run.

Non-Payment of Debts and Your Credit

First let’s talk about the obvious, not paying your bills on time or in full has a negative impact on your credit report. If you are in debt and you are constantly making late payments or making partial payments your credit score is falling every day. The resulting late fees and added charges create more difficulty in being able to pay the debts. Many times people will get loans to pay loans, this also does not cure the situation and is just another debt you can’t pay. This results in an inability to repair your credit score.

Debt Forgiveness, Charge-offs, and Your Credit

Second, any debt that is not paid in full stays on your credit for 7 years. This is typically called “debt forgiveness” or a “charge-off.” Any agreement with a creditor that allows you to pay a lump sum and have the rest of the debt forgiven still has a negative impact on your credit report. Of course this option is only available if you have money to give the creditors in order to have debt forgiven. For lenders, this is almost as bad as a bankruptcy because it lets them know that you have not paid all of your debts in full in the past. However, if you have the means to make lump sum payments this can be a good option.

Bankruptcy and Your Credit

Lastly, let’s talk about bankruptcy and your credit. A bankruptcy stays on your credit report for 10 years. Now, 10 years is a long time, but that DOES NOT MEAN THAT YOU CAN’T GET A LOAN FOR 10 YEARS! In fact, the general rule among lenders and bankruptcy attorneys is that lender’s will start loaning money in about 2-3 years. During that 2-3 years, I advise clients to stick to cash transactions. Remember that with a large enough down payment most lenders will loan money.

Most importantly, a bankruptcy can allow you to get rid of your debts, which then allows you to begin to rebuild your credit. I like to compare it to pressing the reset button on your credit. You will have to start over with a low score, but you are given a fresh start and are given the opportunity to manage your credit better. In the end, the fastest way to restore your credit is to get rid of the debts that are bringing it down.

If you would like to talk an experienced professional that can advise you on your ability and best options to get rid of your debts and repair your credit score contact us today at 864-399-7888.