The decision to file bankruptcy is not one that comes easily for most people despite the vital role it can play in providing those saddled with overwhelming debt a lifeline to rebuild their financial lives. Many people are still influenced by outdated stereotypes that view bankruptcy protection as some sort of immoral act. Others believe that bankruptcy is a fatal blow to one’s credit and makes the prospects of being a homeowner or establishing credit in the future virtually impossible. These outdated myths often prevent those who need bankruptcy relief from doing the one thing that can have the most positive long-term influence on their credit – filing bankruptcy. Confused? Yes, I said that bankruptcy could be an important step in rebuilding your credit.
There are those who labor under a mountain of debt for years struggling to make "interest only" payments as principle piles up as they slowly sink deeper and deeper into debt. As adverse creditor actions become more and more oppressive, these individuals slowly sink like a person hopelessly thrashing about in quicksand. Sometimes this merely delays the decision to file bankruptcy, which is virtually inevitable given one’s debt load and income. As a family sinks deeper into debt, their credit continues to get worse, and they struggle financially but make only minimal or no progress in obtaining either relief from debt so that they can improve their lifestyle or toward starting over.
This is where bankruptcy can be a key factor in both rebuilding one’s financial life and even improving one’s credit. Certainly, either a Chapter 7 Bankruptcy or Chapter 13 Bankruptcy will have an adverse impact on a debtor’s credit in the short-term. However, a bankruptcy discharge is like a branch extended to the debtor sinking in quicksand. Whether you file a Chapter 7 or Chapter 13 Bankruptcy, you will receive a discharge so that you start over with most or all of your financial obligations being eliminated. There are exceptions as some debts may not be subject to discharge or be more difficult to discharge including student loans and taxes or secured debts where you choose to keep the collateral (i.e. family home or vehicle).
The point is that when you emerge from bankruptcy, you will have very little or no debt, and income to debt ratio is an important factor in one’s credit rating. Further, the fact that all (or most) prior financial obligations have been extinguished by the bankruptcy discharge means that those debts should not be considered by future creditors. Sometimes creditors whose debts have been discharged have no incentive to remove these debts from your credit report so it is a good idea to write to the three credit bureaus and challenge any discharged debts.
The bottom line is that a person who has discharged their debts in bankruptcy and has little or no debt generally is considered a safer credit risk then the person sinking in quicksand of overwhelming debt who has a truckload of write-offs and collection accounts. A creditor knows that once a person obtains a bankruptcy discharge, the debtor must wait a substantial period of time before the debtor can again obtain bankruptcy relief. If you slowly and gradually begin to rebuild your credit following a bankruptcy you can actually put your credit back on course more quickly by filing for bankruptcy rather than delaying the inevitable while drowning in a sea of debt.
