Filing for bankruptcy can be a saving grace and vital step in helping businesses and families get back on their feet financially. Becoming bankrupt, however, is stigmatized in many ways. A large part of that stigma comes from how bankruptcy can affect credit. The fear of damaged credit or a credit report stamped with the implications of bankruptcy is often a strong deterrent for those considering filing for bankruptcy. Our attorneys at Behm Law Group, Ltd. provide legal advice and assistance to help you through the effects that bankruptcy in Mankato, MN, can have on your credit.
A bankruptcy filing can stay on your credit report for several years after filing. While a bankruptcy filing does impact your credit score, there are other factors to consider when it comes to bankruptcy and credit. A bankruptcy filing can actually be the starting point for rehabilitating your credit. To creditors, a bankruptcy filing is more a point of demarcation on your credit file. It shows creditors that before the bankruptcy filing your debt to equity ratio was skewed negatively such that the total of your debt far exceeded the value of your assets. It shows creditors that before the bankruptcy filing, your limited income was committed to and divided among many creditors. After a bankruptcy filing, your debt equity ratio will look much more favorable because the many creditors you had will no longer be relevant. New creditors will no longer have to compete with those old creditors with regard to your ability to make payments. After a bankruptcy, creditors know that they don’t have to compete with many creditors and that you can’t file for bankruptcy relief for several years. They are, therefore, more incentivized to work with you.
Chapter 7
Filing for Chapter 7 bankruptcy will essentially discharge all of your debts that are not exempt from the process, such as tax debt or child support debt, or denied based on situational grounds, such as debts that you may have incurred fraudulently. Chapter 7 will remain on your credit report for a maximum of ten years. This may seem hopeless with regard to increasing your credit, but, as related above, you will likely actually be more attractive to future creditors.
Chapter 13
Debts discharged during the Chapter 13 bankruptcy process are shown on your credit report no differently from Chapter 7. However, under the Fair Credit Reporting Act (FCRA), your creditors must denote those claims in such a way reflecting that you are no longer responsible for them. Your creditors must not list such claims as “past due” or “delinquent” or “account in collections” or “account assigned to legal”. Rather, they must list the claims as “account included in bankruptcy” or “account discharged in bankruptcy” or other similar language. If creditors fail to list the claims appropriately, a person can commence legal action against them under the FCRA.
