Just how badly does bankruptcy hurt your credit?

[lotsahats]

The failing economy hit my family hard a few years ago, and, as a result, we were forced to live off our credit card for a few months. To this day, we have been unable to break the resulting cycle of debt, and are forced to file Chapter 7.

I was wondering, just how badly does bankruptcy hurt your credit?

I'm sort of torn over whether or not to get another credit card after my debts are discharged. I know it would make a powerful tool for rebuilding my credit, and having one saved us when we needed it...but at what cost? (I swear, their slogan should be, "Payback's a b****!")

[DesdemonaB]

High debt to credit ratio, missed payments, inquiries, slow pays, high interest rates, bounced checks, lower credit limits, collections, tax liens, judgments etc are just as bad as a BK; difference is after a BK discharge your score can only go up.

As for falling in to the same pattern, yes there is an extreme high risk and living “off the grid” would be a blessing for most; but like me some of us have to live in a world based off credit. Bank accounts, car/life/health insurance, business expenses, rent a house/apartment, buying a house one day, book a flight/car/hotel etc.

Best advice would be survive your BK, clean your credit reports, get ONE (1) major credit card and that’s it. IMHO cleaning your reports after the BK could do you better then getting that “new” credit. For example a “Good” (and I use that term loosely) score lowers your car insurance, you take that savings put it to your monthly credit card balance keeping your limit to balance ratio under 20%, not missing a payment allowing you to get a “higher” credit score that allows you to purchase a car/house at an interest rate that is under 5%. Or even better take that savings and bank it, then purchase that car/house in cash.

It’s all about choices, what do you want the outcome of your BK to be?

[SunshineGal]

I agree with almost everything desdemonaB said, except you actually need 4 trade lines to re-establish your credit. Ideally, there's a mortgage, car loan, one major credit card (V/MC with a limit over $1500) and one other credit card which can be something simple like a gas card, department store...whatever. I should also add that in order to have the credit card, you do have to use it. I like the idea of paying for major purchases such as a TV, computer, appliance, etc...with a credit card which gives the added protection (usually doubles manufacturers warranty) but ONLY if you already have the cash set aside and pay it off the day the bill comes in. They key is to use the card without actually carrying a balance.

[bcohen]

How badly bankruptcy hurts your credit depends on how bad your credit was to begin with, and in some cases filing for bankruptcy can actually improve your credit scores! If your credit is already very bad, such as in the 400 to low 500 range, then filing for bankruptcy will not make it any worse, and can actually add as much as 20 to 30 points to your score. If your credit is currently good, then bankruptcy will reduce it to the 500 range.

[DesdemonaB]

I agree with almost everything desdemonaB said, except you actually need 4 trade lines to re-establish your credit. Ideally, there's a mortgage, car loan, one major credit card (V/MC with a limit over $1500) and one other credit card which can be something simple like a gas card, department store...whatever. I should also add that in order to have the credit card, you do have to use it. I like the idea of paying for major purchases such as a TV, computer, appliance, etc...with a credit card which gives the added protection (usually doubles manufacturers warranty) but ONLY if you already have the cash set aside and pay it off the day the bill comes in. They key is to use the card without actually carrying a balance.

Thanks SunshineGal - you are correct too I try to forget about those store CCs - that's what got me in trouble in the first place.

To add to your using a card w/o actually carrying a balance would be awesome but if it's not possiable every month - keep that balance to limit ratio under 20% and that too will help your score climb.

Be patient with mortgage it's a minimum of a two year from discharge if you did NOT include a mortgage in the BK and a minimum of three from the date of deed transfer if you included a mortgage.

I personally did not have a mortgage in my BK and spoke with a friend who's a broker who said that I have a good chance in getting a manual review in about a year post close (I'm an asset case) due to some good key factors. I will have almost 13 years at my employer, 21 years in the same field, 4 1/2 years of perfect rental history, established credit with a car loan and small credit card. My credit score is currently over the mortgage medium of 620 and hopfully will only go up and I have up to 17K in down payment (401K). I would be a first time home owner and he said that is enough for a good broker to request a manual review.

Regardless that's about late 2012 so till then I just hope to keep out of trouble and rebuild slowly.

[oicu812]

i got a prefile credit report and shows my current score and what my score will be like a year after ..it was a dramitic increase /shrug

[frogger]

Think of bk as the nuclear option for your credit score. You take a big hit, everything is wiped out, and the reconstruction of your life can begin.

Or.... you can let the carpet bombing continue day after day after day with the bad debt that lingers around and keeps on giving. There is no way to move forward with this happening to you every day.

[angles]

Good analogy Frogger. To bad the government is not taking the same approach.