People in California file for bankruptcy for a variety of reasons, from simply being overwhelmed by debt to attempting to stop a mortgage foreclosure. After making the decision to file for bankruptcy and going through the process and obtaining a discharge, people wonder what is next. One of the most pressing concerns is how long it will take for their credit score to improve. While there is no one clear answer, our experienced Sacramento bankruptcy attorney examines that question in more depth below.
What Determines Your Credit Score in California, Before or After Bankruptcy?
First, it is helpful to understand some of the information used to determine your credit score. Your credit score is influenced by many factors, typically weighted towards your amount of debt and your payment history. Your score will be affected by how long you have been actively borrowing and the diversity and amount of debt you have acquired, including credit cards, student loans, car notes, and mortgages. Additionally, your score is impacted by your debt to income ratio and other outside forces, such as the number of times your credit report was investigated. This information is collected over months and years, so a credit score generally moves slowly one way or the other. Any significant improvement will take time, management, and hard work.
The Chapter of Bankruptcy in California and its Effect on Your Credit Score
Most people in California who file for bankruptcy will file Chapter 7 or Chapter 13. Both will have different effects on your credit score. The first difference is the length of time the bankruptcy will remain on your credit report. A Chapter 7 bankruptcy will appear on your report for ten years from the date of final discharge, while a Chapter 13 bankruptcy will remain on your credit report for seven years from the discharge date.
What your credit score is at the time of filing will also influence how your score is affected. If you file and have a significantly high credit score, 780 for instance, you will see a substantial drop of 200 to 250 points. However, if your credit score was fair to low, for example, 580, then you will not see a significant shift in your score.
The two chapters of bankruptcy also inherently function differently. A Chapter 7 bankruptcy is typically five to six months in length, with the majority of a debtor’s unsecured debt being eliminated in the end. People who file Chapter 7, see a relatively fast change in their debt to income ratio.
Conversely, a Chapter 13 bankruptcy will last from three to five years. Depending on many factors, a debtor’s unsecured debt could either be eliminated or paid through their bankruptcy plan. It is only after the discharge that a Chapter 13 debtor sees the change in the debt to income ratio.
Improving Your Credit Score After Filing for Bankruptcy in California
If you were to do nothing after filing bankruptcy, you would not see any significant change in your credit score until your bankruptcy was removed from the credit report, either seven or ten years, depending on the chapter you filed. Now, in some cases, if your credit score was terribly low, Chapter 7 could give it a slight increase. However, that increase would not mean you have a “good” credit score.
Debtors in California have options to improve their credit score after bankruptcy. You can take proactive measures to improve your score. It is important to note that the process still takes time; credit scores shift slowly because of the way the information is gathered and calculated.
The first thing you want to do, about six months after your discharge, is to see if your credit report is accurately reflecting your bankruptcy and that there are no delinquent balances that were discharged still being reported. Our California bankruptcy attorney could help you file a dispute with the credit bureaus if your creditors failed to report the discharged balances.
If you reaffirm a car loan or mortgage during your bankruptcy, you also want to ensure that the payments you are continuing to make are reported to the three credit bureaus. It is not uncommon, after a bankruptcy, for a creditor to stop reporting payments made under a reaffirmation agreement. Making timely payments under a new contract should improve your credit score.
One of the easiest ways to build credit is through the use of a credit card. After you receive your discharge, you should have a lower debt to income ratio and no current outstanding unsecured debts to pay. More importantly, for credit card companies, you are prohibited from receiving a discharge for up to eight years. Unfortunately, because of your bankruptcy, you are still considered a high-risk, meaning you will face higher interest rates and lower credit limits. The key, however, is to use the card wisely, paying it off monthly, and never incurring any interest fees.
If you are unable to get approved for a traditional credit card, you could apply for a secured credit card. Unlike a regular credit card, you will be required to pay a deposit to use the card. Still, this is a way to repair your credit if you manage correctly. Also, retail and gas cards usually have less stringent qualifications for approval.
Another option, though less effective, is to become an authorized user on the credit card of a friend or family member. By utilizing another person’s good credit, you could slowly rebuild your own.
To Learn More About Bankruptcy its Effect on Your Credit Score, Call Our California Bankruptcy Attorney for a Free Consultation
Bankruptcy is a powerful tool in reestablishing your financial footing. However, in most cases, it is just a start. Rebuilding your credit takes patience, effort, and proper planning. Our Roseville bankruptcy attorneys understand that bankruptcy is one step in the process. We are available to assist you in getting the full benefits of bankruptcy after you receive your discharge, as well as being there to guide you through the process itself. Call The Bankruptcy Group at (800) 920-5351 to schedule a free consultation to review your post-bankruptcy options.