Bankruptcy – Effect on Credit

Bankruptcy and Your Credit Rating

Many debts are revolving.  This means that you have a credit limit, which you borrow against and repay.  Once repaid, the full limit is once again available.  Your credit report will show a rating between R1 and R9 for each of your revolving debts with R1 being the best and R9 being the worst.

After you declare bankruptcy, all of your revolving credit will show an R9 credit rating.

In addition, a footnote will be added to your credit report informing potential lenders of your bankruptcy.  This footnote is removed 7 years after you are discharged from your first bankruptcy and 14 years after being discharged from your second bankruptcy.

Credit Rating vs. Being Debt Free

Which is more important: Your credit, or being debt free?  While everyone would like to become debt free without damaging their credit, if you had to choose one or the other which would it be?  In our opinion, the answer hinges on your ability to repay your debt.  If you can do it on your own, then you can preserve your credit rating and be debt free; a great combo!  If you can’t repay 100% of your debt on your own, then the only way to maintain your credit rating is to stay in debt.  In this case, we suggest that your credit rating is less important than becoming debt free, and that its time to consider your options.

Your Current Credit Rating

Bankruptcy’s affect on your credit rating is relative to how good your current credit rating is.  Many people that we hear from have been struggling with debt for some time and have either missed payments, maxed limits, or have certain debts in collections.  The negative affect of bankruptcy is less significant for people who’s credit rating may have already suffered from their financial situation.  This is an important consideration for those concerned by the bankruptcy’s affect on credit.

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