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What to Really Expect From Bankruptcy

While filing bankruptcy is often a last resort for those, whose finances have plummeted, it's important to know what's true and what's not when considering it as your next step. Work towards speeding up your credit recovery and minimizing effects by understanding the correlation between a bankruptcy and its effect on your credit scores.

You may think, or maybe you were even told, that having no negative information on your report before filing for bankruptcy will give you a higher post-bankruptcy score. However, this has little effect on the overall result of your credit score after bankruptcy. The biggest determining factors here are bankruptcy information, and length of time since the information appeared.

If you think all bankruptcy information stays on your credit report for 10 years no matter what, you're also misinformed. In fact, only Chapter 7 bankruptcy lasts for 10, the rest remain for only seven years including: trade lines indicating “account included in bankruptcy,” third-party collection debts, judgments, and tax lines discharged through bankruptcy, and chapter 13 public record items.

Maybe you're worried about having a low credit score as long as bankruptcy information lingers on your reports; however this isn't the case either. Of course you're not going to have a stellar score; however with properly managed credit afterwards you could achieve a 700 or higher after only 4 or 5 years. How can you do that? You will need to add “positive” credit, such as secured credit cards and installment loans to offset negatives, make payments on-time always for all debt, low balanced credit cards that make up less than 25% of credit limits.

Not all bankruptcy is created equal, which means consumers will be impacted differently depending on the amount of debt discharges, how many debts are included in the filing, proportion of negative to positive accounts on the report and so on. Which means if you have a relatively low debt total spread over a few accounts you could end up with a higher score after bankruptcy than someone who's bankruptcy is more extensive.

Don't be fooled into thinking that credit history associated with bankruptcy accounts will be removed from the report. In reality, all of the bankruptcy-related events appear on your credit report and is considered by a scoring formula for all of the seven to 10 years after bankruptcy. However, the negative impact does decrease over time.

You can also qualify for an FHA home loan a mere two years after your bankruptcy is discharged, provided you meet all other requirements by that time.

Talk with your bankruptcy attorney before leaping into bankruptcy so you can discuss all of your options and come up with the best plan of action for your situation. This way you can minimize any damage necessary, and jump-start your re-establishment in the credit world.

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