Will Bankruptcy Hurt my credit?

Many people fear that filing for Bankruptcy relief will ruin their credit forever. The exact opposite is true. In order to understand this, we have to look at how the credit and collection industry works and how that relates to Bankruptcy.

First, the Bankruptcy Code does not regulate the credit reporting industry. Other federal laws, and state laws, control how those businesses operate. What the Bankruptcy Code says is that you must report that you have been Bankrupt for ten years. That is about that.

The three major credit bureaus do not carry your Bankruptcy for 10 years. In fact, they drop off your bankruptcy after 7 years. So, for those credit purposes where they do not ask if you have been bankrupt in years 8, 9 or 10, you do not have to volunteer the information and they will not likely know from the major credit bureaus. Of course, you must always tell the truth when asked.

But, the most interesting part is how the system deals with your pre-bankruptcy late payments and defaults. In the non-bankruptcy context, you can envision your credit score as the compilation of events on a sliding time line. Start today and look back 7 years, anything that happened in that 7 years, good or bad, influences your current score. That is true even if you pay off all of your debts now. Your score is still influenced by derogatory items going back 7 years. But, if you file bankruptcy, those items are cut off under current practices. You re-enter the market place empty of all credit experience. This means that positive credit postings have a much greater positive effect post bankruptcy. So, the practical, though not the legal answer to the first question is: No Bankruptcy will not hurt your credit. That is, of course, assuming that you need bankruptcy help.

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