How Does Bankruptcy Affect My Credit Score in California?

If there is one aspect of bankruptcy that many debtors focus on when considering their options, it is the hit to their credit report that seems the most daunting. Many people believe that filing Chapter 7 or Chapter 13 bankruptcy will be devastating to their credit, ruining any chances for a financial future. In truth, the process carries many benefits that could outweigh the negative. Therefore, though bankruptcy does affect your credit score in California, you need to assess additional factors to determine the most suitable solution for you.

The overall advantage of filing bankruptcy is that you get a fresh start with your financial standing, and it impacts your life in ways you may not expect. Your stress eases when creditors are not constantly hounding you, leaving you anxious about lawsuits. Plus, there are plenty of ways you can rebuild your credit right away.

You are in a better position to take advantage of the benefits when you have a California bankruptcy lawyer to advise you and assist with the process. Because your credit score is still important, some information about the implications is also useful. 

Chapter 7 Bankruptcy and Your Credit Score

You could completely wipe out all qualifying debt when you opt for Chapter 7, which is termed discharge bankruptcy. However, this remedy carries harsh consequences for creditors who cannot collect on your debt. For this reason, the criteria to qualify for Chapter 7 are strict to include only those who truly need assistance. To qualify, you must meet one of the following:

1. Your earnings fall below the state median income level, as adjusted by your household size.
2. If your income is too high, you may be eligible under the Means Test that takes into account your monthly expenses.

If you are eligible for Chapter 7, keep in mind that the bankruptcy trustee has the power to liquidate your assets to pay creditors. You can use exemptions to protect certain items, including your home and personal property.

Chapter 7 could cause your credit score to drop a few to several hundred points, depending on the specifics of your case. Your bankruptcy case will remain part of your credit report for 10 years following the proceedings. 

How Chapter 13 Affects Your Credit Score

It is also possible to discharge qualifying debt through Chapter 13 bankruptcy, but different rules apply to these cases. The focus is a debt repayment plan, which you develop and complete as a way to satisfy your debt to creditors. Your assets will not be liquidated, and the eligibility criteria are relaxed compared to Chapter 7. To qualify, you must have a job to earn an income to pay under the debt repayment plan.

In your plan, your debts are organized into a single monthly payment that you can afford on your income. This results in paying creditors less than what you owe, sometimes just a percentage of your total debt. You will be required to complete the debt repayment plan within 3 to 5 years.

For Chapter 13 cases, the exact implications for your credit score will vary based upon your circumstances. You can expect a drop of at least a few hundred points. A Chapter 13 bankruptcy will remain on your credit report for up to 7 years after filing. 

Effects on Credit Without Bankruptcy

This information about your credit score and credit report may be sobering, but you need to view the big picture when it comes to debt. Consider your situation if you do not file for Chapter 7 or Chapter 13. You could be making payments for years, but these amounts only cover interest and late fees. The underlying debt remains the same or could even increase.

Plus, when you are paying the minimum amount because it is what you can afford, your credit score will drop significantly. Though you have not filed for bankruptcy, the effects of negative credit will still be reported. By the time you get ahead,  if that time comes, several years could pass. You could be paying for much longer than the 7 to 10 years a bankruptcy case is on your credit report. 

When you file for bankruptcy, you get to keep your income. Instead of working harder and slashing your budget to pay creditors, you will have no debt to pay back. Your focus can be on rebuilding credit, a task that can start right away.

Tips for Rebuilding Credit After Bankruptcy

Bankruptcy may be reported on your credit report, but you also have a clean slate from a debt standpoint. As soon as you file, before your case has even concluded, you can begin taking steps to boost your score. For instance:

• If you have a mortgage, you should continue to pay it. Your monthly payments will be reported to show a positive track record.
• Make sure to pay all bills on time, in full. This includes utilities, rent, cell phone service, cable, internet, and many others.
• Continue to pay alimony and child support, as these are debts you cannot discharge in any bankruptcy case.
• Consider a secured credit card or personal loan, in which you deposit cash as collateral.

Legal Steps for Bankruptcy Cases

Initially, it will be important to determine what type of bankruptcy best suits your situation. You may not qualify for Chapter 7, which makes Chapter 13 your only option. Still, you might seek Chapter 13 if you do not want to lose assets through Chapter 7 liquidation. By consulting with a legal professional, you can learn the most appropriate solution to meet your goals.

Plus, a California bankruptcy lawyer will guide you through the steps for bankruptcy cases. They include:

• Organizing financial documents related to your assets, income, debt, and expenses;
• Preparing and filing the bankruptcy petition and all necessary schedules;
• Helping you develop your Chapter 13 debt repayment plan;
• Advising you on applying Chapter 7 exemptions under California bankruptcy laws
• Attending the meeting of creditors with you, in which you may be asked questions about the information on your petition; and,
• Wrapping up your Chapter 7 or Chapter 13 case and obtaining the final bankruptcy discharge order.

Rely on a California Bankruptcy Attorney for Legal Help

While you should be aware of how bankruptcy affects your credit score in California, you can see from this overview that there are other factors to consider. Both Chapter 7 and Chapter 13 deliver benefits for your future, and our team at Kostopoulos Bankruptcy Law can explain them in more detail. To learn more, please contact us to set up a consultation with a California bankruptcy lawyer. We can discuss options after reviewing your situation.