Most people do not view bankruptcy as a viable means of repairing credit. However, unlike many credit repair offers, bankruptcy is a legal and effective way to begin repairing and rebuilding credit.
When a consumer files bankruptcy, aging on all delinquent accounts stops. This means if an account is 90 days delinquent, the creditor cannot report it has 120+ days delinquent. The debtor’s credit report will continue to show the debt as 90 days delinquent. The fact that aging on delinquent accounts stops is beneficial to a debtor in that it prevents additional derogatory credit from being reported and negatively impacting his credit.
While a debtor is in bankruptcy, late fees and penalties on unsecured debts stop accruing. Consequently, the balances on these debts stop increasing. This benefits a debtor by preventing his debt to income ratio from growing. A higher debt to income ratio correlates to a lower credit rating.
Because bankruptcy eliminates or reduces unsecured debt, a debtor will have more cash available to pay secured and priority unsecured creditors. As a debtor begins paying these debts on time each month, his credit rating will improve. Moreover, because unsecured debt is reduced or eliminated, a debtor’s credit score often improves once he receives a discharge.
When a debtor files bankruptcy, he must identify all of his creditors by disclosing their names, mailing addresses, the last four digits of the account number, and the amount of the debt owed. It is imperative that a debtor properly list all creditors so that each receives written notice of the bankruptcy filing. Failure to list a creditor may prevent that debt from being discharged.
It is also advisable for a debtor to contact each creditor as soon as the bankruptcy petition has been filed in order to notify them of the bankruptcy filing. When a debtor contacts a creditor to notify it of the bankruptcy, he should be prepared to give the creditor the name and phone number of his bankruptcy attorney, the date the bankruptcy petition was filed, and the bankruptcy case number. Creditors may also want to know in which court the bankruptcy was filed and whether the debtor filed a Chapter 7 or a Chapter 13 case.
If you are struggling with debt, bankruptcy may be a viable option. Although bankruptcy stays on your credit report for seven to ten years and can initially result in a decrease of your credit score, the long term impact of a bankruptcy on your credit score is often positive. A bankruptcy attorney can explain how bankruptcy works and help you decide whether bankruptcy is the best choice for you.