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Columns: Bankruptcy Adviser
Justin Harelik   Expert: Justin Harelik
Bankruptcy Adviser
Minimizing the hit to a credit score after bankruptcy
Bankruptcy Adviser

Chapter 7 impact on credit

Dear Bankruptcy Adviser,
I am considering filing Chapter 7 bankruptcy. Is there any advantage in keeping my credit card and mortgage accounts current up until the filing date? I have heard that the impact on your post-bankruptcy FICO score is determined by the amount of damage done prior to filing. Is this true?
-- Joey

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Dear Joey,
Many bankruptcy attorneys find this question very interesting. The credit scoring model is still somewhat inconsistent regarding bankruptcy or other events that should negatively impact your credit score.

Although I am not a credit score expert, I do understand what impact certain negative events have on your credit. Most credit scoring experts indicate that bankruptcy will reduce your credit score about 200 to 300 points regardless of when you filed. If you have a credit score of 700 prior to filing, then you ought to have a score at around 450 or 500 after filing.

However, clients have told us that they have emerged from Chapter 7 bankruptcy with credit scores in the high 600s. While there is no good explanation, it does appear that filing a bankruptcy while remaining current on all your accounts does increase the chances that you may be able to avoid the dramatic hit.

This is not a rule, but only a random exception to the rule. And I would never tell a client that filing a bankruptcy while remaining current on bills would protect their credit. Based on the credit scoring model, you should see your score decrease after filing bankruptcy.

Typically, there are a few major events that drop your score around 200 to 300 points: bankruptcy, repossession and foreclosure. Experts are inconsistent on the effects of a short sale on a credit report, but most experts believe a short sale has the same 200 to 300 point negative hit to your score. Other events like late payments, high debt-to-credit ratio, judgments and tax liens will have a negative impact.

Also, please be aware that a bankruptcy filing will be on your credit report for the next 10 years, even if you file a case and it is later dismissed. Do not believe any credit repair company that promises to remove this notation from your credit. There is no legitimate way to remove a notice of bankruptcy filing from your credit report, unless someone fraudulently filed a case in your name.

If bankruptcy is your only viable option, then please remember that you can rebuild your credit after bankruptcy. Clients have told me that after fewer than three years from the date they filed bankruptcy, their credit scores had climbed above 600. This means that life after bankruptcy can be positive and full of the same or similar opportunities that existed prior to filing your case.

Bankrate.com's corrections policy -- Posted: June 24, 2008
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