How Does Bankruptcy Impact My Credit Score?

A woman sitting a desk looks into the distance deep in thought

No one sets out with the goal of one day declaring bankruptcy. Everyone wants to be financially stable and independent, but unexpected challenges can arise and result in large amounts of debt. If you find yourself in that situation and you’re considering bankruptcy, you probably have many questions about the possible effects. One of the most common is, “how does bankruptcy affect my credit score?” Keep reading to find out.

What is a Credit Score?

Let’s begin with the basics. A credit score, or FICO® score, is a number between 300 and 850 that attempts to reflect the significant financial decisions you’ve made. Your credit score drops, for example, when you default or make a late payment on a debt. Whereas an established pattern of making payments on time will increase it. Three companies – Equifax, Experian, and TransUnion – track and assign your credit score, and it can have a significant impact on your ability to do everything from borrowing money to getting a job.

What Factors Affect Your Credit Score?

Credit card payments, mortgage payments and rent payments are three types of debt that will have the largest impact on your credit score. The rules around another common type of debt – medical debt – are currently changing, thanks to pressure from the Consumer Financial Protection Bureau. 

There has long been debate about whether or not medical debt should affect credit scores. This is because few people actually choose to take on medical debt, and those that are forced to usually have no idea how much their treatments will end up costing. If this has previously caused issues on your credit report, read up on how the overhauled rules on medical debt might affect you.

Can Bankruptcy Permanently Ruin Your Credit?

Bankruptcy is one of the single largest events that can affect your credit score, and the immediate impact of bankruptcy is substantial. A person with previously solid credit (700+) will see their credit score drop by about 200 points. A below-average to average credit score won’t drop as much. That’s one important factor to keep in mind. If your credit score is good, you will be penalized more heavily than if your credit score is average or worse.

The good news is that the effect is not permanent. In fact, you can start rebuilding credit immediately after bankruptcy is filed. The process takes some time, but financial institutions offer products like secured credit cards and credit-builder loans that can help. Just be sure to make your payments regularly and on time and practice smart spending habits. Financial institutions will look favorably on your efforts to rebuild credit even if you have a bankruptcy on your record.

The effects of bankruptcy can be different, depending on the type of bankruptcy. These are the three most common types of bankruptcy for individuals in the US.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy, also known as “liquidation,” is the most common type of bankruptcy in the United States. A liquidation plan is created, the individual’s nonexempt property gets sold and the proceeds are used to service existing debts. A judge then orders all remaining debts to be discharged. Chapter 7 Bankruptcy can affect your credit score for up to ten years.

Chapter 11 Bankruptcy

Chapter 11 bankruptcy is mostly filed by businesses because under federal law, this is the only bankruptcy option allowed for LLCs, corporations and partnerships. While individuals may file for Chatper 11 bankruptcy as well, it’s less common because Chapter 11 is typically more costly, complex and risky than filing for Chapter 7 or 13. Chapter 11 Bankruptcy can also affect your credit score for up to ten years.

Chapter 13 Bankruptcy

Also called “reorganization,” Chapter 13 bankruptcy allows individuals to repay creditors over a period of three to five years. The benefit is additional time to pay off debts and the chance to renegotiate settlements which typically means the individual has to pay far less than the original debt. Chapter 13 Bankruptcy can affect your credit score for up to seven years.

Is Bankruptcy Right For You?

Imagine Person A and Person B both have $30,000 in debt and are considering bankruptcy. 

The difference is that Person A has a credit score of 750 whereas Person B has a credit score of 550. Both will have $30,000 debt discharged if they declare Chapter 7 Bankruptcy, but the cost for Person A is significantly higher than for Person B. 

That’s because Person A will lose about 200 points to their credit score; Person B will only lose about 100 points. Person A’s new credit score will be ~550; Person B’s new score will be ~450.

Obviously, it’s more worth it for Person B to declare bankruptcy, but it might also be worth it for Person A too. It’s up to you to assess your circumstances and decide if bankruptcy is the tool that will best position you to move forward financially. 

But you don’t have to make the decision alone. In fact, you shouldn’t make this decision alone. Gather as much information as you can, then consult an experienced bankruptcy attorney so you can be sure you understand all of the ramifications of your decision.

There’s no shame in declaring bankruptcy, and it’s not the end of the world for your personal finances. It’s a powerful tool you have at your disposal in the event that your debt burden becomes unmanageable, and if you commit to rebuilding your credit afterward, it can be one of the best financial decisions you’ll ever make.

Should I Stop Paying Creditors If I’m Going to File for Bankruptcy?

Woman looking through bills. OlsenDaines, serving Oregon and Washington explains if you should stop paying creditors if you're going to file for bankruptcy.

If you’re choosing to file for bankruptcy, and you’re current on your debts, you may be asking yourself if you should stop paying creditors now.

Automatic Stay

The short answer is, no you shouldn’t stop paying creditors until you’ve officially filed. When you file for bankruptcy, the court will order an automatic stay which will prohibit lenders from making harassing collection calls, sending threatening letters, and trying to file lawsuits against you. But until then, they can continue to harass you so don’t be surprised if you suddenly stop making payments.

In most cases, the automatic stay remains in effect until your bankruptcy case is concluded. Keep in mind, it won’t stop every debt collector. Automatic stay orders will not halt child support, loans against your pension, or back taxes. And if you filed for bankruptcy in the previous year, the order will expire after 30 days.

  • Auto Loans: if you stop making payment on your auto loan, at some point the creditor will attempt to repossess your vehicle. If you want to keep the vehicle, you may want to continue making payments so you don’t run the risk of getting it repossessed.
  • Credit Cards: in most cases, people are fine not making their credit card payments, but you will likely be subjected to collection calls until you file for bankruptcy. If you just used a card before you realized you were going to file, you may want to continue to make payments. We recommend consulting with a bankruptcy attorney.
  • Home Loans: as with auto loans, if you stop making your mortgage payments, at some point the creditor will attempt to foreclose the home. If you want to keep it, you may want to continue making your monthly payments. Every case is different.

Bank Setoffs

If you’ve taken out loans through your bank or credit union and you’ve stopped making payments, they can institute a setoff. This allows them to withdraw money from one of your accounts to another to cover the loan payment. You may want to move your money around before missing a debt payment.

Experienced Bankruptcy Attorneys

Filing for bankruptcy can help you “start fresh” if you’re facing mounting debt and pressure from creditors. However, there are many missteps you should avoid in the months and weeks leading up to filing.

To ensure you reach your financial goals, it’s best to work with an experienced bankruptcy attorney. OlsenDaines has vast experience with bankruptcy. In fact, we’re the top bankruptcy filer in Oregon. We’ll help you navigate the process and get your life back on track. To schedule your free initial consultation, contact us today!

Life After Bankruptcy

Woman sitting on her sofa in relief, relaxing. OlsenDaines in Oregon and Washington talks about life after bankruptcy.

Filing for bankruptcy can provide you with relief if you’ve struggled with unmanageable debt but it also comes with some new challenges, such as dealing with a low credit score. The bankruptcy attorneys at OlsenDaines want you to start off strong after filing for bankruptcy, so follow these tips as you prepare for life after bankruptcy.

Think Positive

First of all, don’t be ashamed after filing for bankruptcy. We understand there’s a stigma involved with bankruptcy, which is mostly just misconceptions. Think positive, get back up, and try again. Many people and businesses have overcome bankruptcy and you will too.

Start Saving

Sit down and calculate your income and expenses. This will help you determine how much disposable income you have. After you’ve determined that figure, make it a point not to spend more than that every month.

Cut Down on Expenses

If you filed for Chapter 13 bankruptcy, you’ll repay secured debts through a court-managed payment plan. This means you’ll have to change your lifestyle a bit and you cannot take on a new car loan or credit card without the court’s permission first.

Rebuild Your Credit

Now that you’re starting off with a clean slate, you’ll want to rebuild your credit. Keep in mind, this is especially hard the first year following a bankruptcy filing. Apply for a secured credit card. Unlike a typical credit card, secure credit cards require a cash deposit. Pay off the balance each month and over time you’ll improve your credit score. OlsenDaines will set you up on a credit rebuilding program after filing bankruptcy.

Bankruptcy Experts

Any bankruptcy is difficult. Whether you’ve just finished discharging your debts or are thinking about declaring bankruptcy, OlsenDaines can help. We’ve been helping people throughout Oregon and Washington for over 40 years. Visit our website for more about bankruptcy and schedule your free bankruptcy consultation today!

Is Chapter 11 Strictly for Large Corporations

If you have been paying attention to the business news over the years, you have probably read about instances of very large corporations filing for Chapter 11 bankruptcy. Names like Chrysler, General Motors, Dow Corning, United Airlines, and Texaco may come to mind. Without question, Chapter 11 bankruptcies are commonly utilized by large corporations that are struggling with debt that they simply cannot manage. However, this form of bankruptcy can be useful for businesses that are not among the Fortune 500. Read on to get the details.

 

Reorganization Bankruptcy

 

A Chapter 11 is a reorganization bankruptcy. In most cases, the intention is to restructure the financial responsibilities in a manageable fashion so that the business can continue to operate. However, in some instances, the goal will be to effectively liquidate the assets and shutter the enterprise.

 

There is another type of bankruptcy that works in a similar manner called Chapter 13. If you are a sole proprietor or a general partner in a business, you are personally responsible for your business debts. As a result, you can file for Chapter 13. However, many small businesses do not use these structures. They are established as corporations, limited liability companies, or limited partnerships. These entities cannot use Chapter 13; they must use Chapter 11 bankruptcy. This is why Chapter 11 is not strictly for large, publicly held corporations.

 

In very limited cases, a Chapter 11 bankruptcy can be filed by an individual who cannot qualify for a Chapter 13 bankruptcy. There is a debt limit with regard to a Chapter 13 filing, and it is updated every three years. At the time of this writing in 2017, the Chapter 13 limit for secured debts is $1,184,200. For unsecured debts, the limit is $394,725. If your level of debt precludes you from a Chapter 13 filing, you could choose to file for a Chapter 11 bankruptcy.

 

Act in a Fully Informed Manner

 

We have covered one aspect of the intricate bankruptcy maze in this brief blog post. If you are a business person or an individual who is struggling with debt, you should certainly discuss all of your options in detail with a licensed bankruptcy attorney. Our firm serves clients in Portland, Eugene, and many other cities in Oregon, and we also have a couple of offices in Washington. We offer free consultations, and you can reach out to us through our contact page to request an appointment.

 

 

Are There Different Types of Bankruptcy?

If you sit down and discuss your options with an attorney, you may be surprised to hear that there are multiple different types of bankruptcies. An individual will probably be best served by a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.

With a Chapter 7 bankruptcy, an automatic stay is imposed, so all collection efforts will immediately come to a halt. You can maintain possession of your car and your home if you are up to date on your payments and you don’t have a lot of equity. Property that is not exempt must be turned over to a trustee so it can be liquidated. The proceeds will be used to pay the delinquent debts. However, most people who file for this type of bankruptcy have little or no non-exempt property to surrender.

Unsecured debt will be discharged, so you will no longer have to be concerned about collection calls from credit card companies or collection agencies. A Chapter 7 bankruptcy will stay on your credit report for 10 years; that’s the bad news. The good news is that you still may be able to obtain debt after you file if you need to, but you will typically be required to pay higher rates of interest.

Chapter 13 is a reorganization bankruptcy. If you have enough disposable income to make payments on your debts, you will not qualify for Chapter 7, but you can still file for Chapter 13. Under this form of bankruptcy, you will get the same automatic stay. You will be able to maintain possession of your property if you can keep your payments current, and a three to five-year debt repayment plan will be submitted to the court. This plan can include past due mortgage or car payments, so a Chapter 13 can help you avoid a foreclosure or repossession if you have fallen behind. A Chapter 7 does not allow for a repayment plan to correct mortgage arrearage over a period of years.

A Chapter 11 bankruptcy is a reorganization bankruptcy that is used by business entities, but some individuals with very high levels of debt may qualify for this type of bankruptcy. Chapter 12 is a special form of reorganization that is available to some family fishing businesses and family farmers.

We have provided a brief overview in this blog post, but we will be more than glad to answer all of your questions in detail. Our firm offers free consultations to clients in Portland, Medford, Grants Pass, Roseburg, and a number of other cities in Oregon and Washington. If you will like to set up an appointment, fill out the request form on this website and we will contact you ASAP.

Which Type of Bankruptcy Should I Choose?

Our law firm offers bankruptcy assistance for clients in a number of cities in Oregon and Washington, including Salem, Portland, Grants Pass, Bend, Vancouver, and TriCities. When you decide to file for bankruptcy in one of these states, you have multiple options, and the circumstances will dictate the ideal course of action. For most individuals, it will be a choice between a Chapter 7 bankruptcy and a Chapter 13 bankruptcy.

Chapter 7 is a “liquidation” bankruptcy, and you receive an automatic stay when you file. This temporarily prohibits creditors from trying to collect on debts that are outstanding. When you successfully file this type of bankruptcy, your unsecured debts like credit card balances and medical bills are completely eliminated. If you are a homeowner and you are current on your mortgage payments, as long as you do not have a great deal of equity, you can file for Chapter 7 and retain ownership of your property. You can also keep your car if you are not behind on the payments and you have limited equity in the vehicle.

In order to qualify for a Chapter 7 bankruptcy, you have to be able to pass a means test. Though there are exceptions, if your income exceeds the median income in the state of your residence, you cannot qualify for a Chapter 7 liquidation. Under these circumstances, if your debt is unmanageable, you may want to opt for a Chapter 13 reorganization.

When you file for chapter 13, you are allowed to keep all of your property, and you use your disposable income to make monthly payments that you can afford. Also, if you are not current on your home or car payments, you can make up these payments over time through the chapter 13 and retain ownership of your home or car. A chapter 7 will only temporarily delay a creditor from foreclosing or repossession if you are not current.

In addition to these two forms of bankruptcy, there is Chapter 11, which is a reorganization plan for businesses and individuals who have very high levels of debt. Chapter 12 is a reorganization bankruptcy that is available to certain family farmers and fishermen.

If you are a resident of Portland, Grants Pass, Salem, Vancouver or TriCities, we will be more than glad to provide you with a free bankruptcy case evaluation. These sessions are very relaxed, and we make every effort to make our clients completely comfortable every step of the way. You can simply click this link to take the first step, and the professionals here at OlsenDaines will take care of the rest.

What Is a Reorganization Bankruptcy?

If you are trying to gain a basic understanding of the ins and outs of bankruptcy, you will invariably come across some terms that you may not fully understand in the context within which they are being used. With this in mind, this blog post will provide a basic explanation of the term “reorganization” as it applies to bankruptcy.

Chapter 13 Bankruptcy

Some people are under the impression that your debts are simply wiped away when you file for bankruptcy. In fact, this is not necessarily the case. It all depends on the type of bankruptcy that you file coupled with unique circumstances surrounding your case. There is a type of bankruptcy called a Chapter 7, and unsecured debt like credit card balances and unpaid medical bills can be completely discharged if you file this type of bankruptcy. However, you cannot qualify for a Chapter 7 if you have enough disposable income to make reasonable payments toward your unpaid debts after your basic living expenses are met. Under these circumstances, you would have to file a Chapter 13 bankruptcy.

A Chapter 13 bankruptcy is a reorganization bankruptcy. Your debts are reorganized, and you make payments over a three-year or five-year period. You don’t lose any of your property, and if you are behind on your mortgage or your vehicle payments, you can pay back the arrearage through the payment plan. High priority debts must be paid in full, and these would things like child support, spousal support, and some income tax debt. Secured claims such as your home mortgage arrearage would also be paid in full through the terms of the reorganization plan.

However, you may wind up paying a fraction of low priority unsecured debts like credit cards balances and medical bills. In fact, you may not pay any of this debt at all if your disposable income cannot stretch that far. At the conclusion of the term, the unsecured debts would be discharged, and the creditors would not be able to seek repayment from you going forward.

Chapter 11 Bankruptcy

A Chapter 11 is another type of reorganization bankruptcy. This form of bankruptcy is primarily utilized by business entities like corporations and partnerships. However, there is a debt limit for individuals who would like to file for Chapter 13. Some of these people can opt for a Chapter 11 reorganization.

If you would like to learn more about reorganization, we would be glad to assist you. Our firm offers free case evaluations to people in Medford, Klamath Falls, Portland, and other metropolitan areas in Oregon and the state of Washington. To set the wheels in motion, send us a brief message through our contact page.

Small Business Bankruptcy FAQs

If you are involved in the operation of a small business and things are not going very well financially, you may have questions about the potential benefits of bankruptcy. We provide this type of assistance to people in Tacoma, Tri-Cities, and Vancouver, Washington. Our firm also has offices in many different locations throughout the state of Oregon, including Portland, Eugene, and Medford. We have successfully counseled countless small business people over the years, and we are often asked many of the same questions. In this blog post, we will take a look at a few of them so that you have a basic foundation of information to draw from going forward.

Am I personally responsible for debts that have been incurred by my business?

The answer to this question depends upon the business structure that you are utilizing. If you are the sole proprietor of your business, you would in fact be held personally liable for the business debts. The same thing is true if you are a general partner in a partnership. On the other hand, if your business is a limited liability company, a corporation, or a limited partnership, generally speaking, you would not be personally responsible.

What types of bankruptcies are available to small business people?

There are three types of bankruptcies that are often used: Chapter 7, Chapter 13, and Chapter 11. Chapter 12 bankruptcy is also a possibility, but it is only available to family fishing businesses and family farmers.

What kind of bankruptcy should I file if I want to shut down my small business?

In many cases, a Chapter 7 will be the most efficient and effective choice under these circumstances. This is a liquidation bankruptcy that is available to limited liability companies, corporations, and partnerships. If your business qualifies and you file for a Chapter 7 bankruptcy, the bankruptcy trustee would liquidate the business property to pay back as much as possible, and the business would not be responsible for any debt that may remain.

You can also use a Chapter 7 bankruptcy if you are a sole proprietor, but it would be personal bankruptcy that encompasses your business debts.

Schedule a Small Business Bankruptcy Consultation

Now that you understand a few of the basics, you may be ready to take the next step. If you would like to schedule a free case evaluation, give us a call at 1-800-682-9568.