For many people, debt can be a crushing burden. Everyday Americans are struggling with home mortgages, car loans, student loans, credit card debt, and so much more. Finding a way out can seem impossible. You’re not alone. According to CNBC, consumer debt in the US has reached a towering $14.88 trillion as of the end of 2020, up $3 trillion from what it was in 2010. If you find yourself struggling to pay your creditors, you might wonder if filing for bankruptcy in Georgia is the right decision.

It can give you the breathing room you need and depending on the type of bankruptcy you file, it might wipe your slate clean and give you a fresh start. However, before you decide to pursue Chapter 7 or Chapter 13, Georgia residents should understand how filing for bankruptcy will affect their credit scores.

In this post, we will explore everything you need to know about how bankruptcy affects your credit score. The goal is to help you make an informed decision and find the debt relief that you need while still protecting your financial standing.

 

What Does Bankruptcy Do?

Bankruptcy is a legal proceeding that can be used to restructure/reorganize your debt burden. In some cases, you’re able to eliminate your debt entirely, but it’s not as simple as a judge telling your creditors to leave you alone. Each type of bankruptcy works differently:

• Chapter 7: In Chapter 7, your debts are wiped away completely. However, many of your assets will be sold to help ensure that your creditors can obtain some return on the debt that you owe. There are exemptions, such as the home you live in and your personal vehicle, but others, such as vacation homes, boats and personal watercraft, and other assets will be sold. Any remaining debt is discharged without repayment. There are also income caps that limit who can pursue this type of bankruptcy.

 

• Chapter 13: In Chapter 13, your assets are not sold, but your debts are also not wiped away. In this type of bankruptcy, your debts will be reorganized so that you can continue making payments on them. It’s more about giving you breathing room while ensuring your creditors receive their money than it is about gaining a fresh start. With that being said, some types of debt can be discharged, such as medical bills. Unlike Chapter 7, there are no income limits here.

 

While Chapter 7 and Chapter 13 work differently, they both affect your credit score. However, they do not do so in the same ways.

 

How Long Will a Georgia Bankruptcy Remain on Your Credit Report?

Both types of bankruptcy will remain on your credit report for many years. However, they do not remain for the same length of time and this is a direct reflection of whether you repay your creditors or not.

Chapter 7 will remain on your credit report for up to 10 years. Chapter 13, on the other hand, will only remain on your report for up to seven years. Again, this is because, under Chapter 13, you repay at least a portion of your debt.

Under Chapter 7, you make no repayments. That tells financial institutions that you are a higher risk than someone who repaid at least a portion of their debt. In many cases, Chapter 7 will also drop your credit score lower than Chapter 13 will.

 

How Will Bankruptcy Affect Your Credit Score in Georgia?

Filing for bankruptcy will always affect your credit score negatively. However, the degree that it drops your score varies based on quite a few factors. We’ll explore those below. First, though, let’s explore what a credit score is to better understand why it matters if it drops.

 

What Is a Credit Score?

A credit score is basically your creditworthiness summed up as a number. The national average as of 2021 is 711 – an all-time high. The range runs from 300 to 850 and is broken down as follows:

• 300 – 629 (bad)
• 630 – 689 (fair)
• 690 – 719 (good)
• 720 – 850 (excellent)

 

Note that this is only your FICO® Score, though. It is the most widely used credit score, but there are others used today. For instance, if you’re interested in purchasing a car, your salesperson will likely pull your Vantage Score instead of your FICO Score. Each score differs, as well.

So, what affects your credit score? It really comes down to the type of bankruptcy, the number and amount of the debts being discharged, and your credit history.

 

Bankruptcy Type

One of the most important factors in how bankruptcy affects your credit score is the type of bankruptcy in question. Chapter 7 almost always lowers your score more than Chapter 13 because of the lack of repayment. However, both types reduce your score significantly and will do so for several years to come.

 

The Number of Debts and the Amounts

The number of debts and their amounts discharged will also affect your credit score after filing for bankruptcy. You will see a much more significant drop if you default on multiple, large debts than if you default on a handful of smaller debts. Multiple small debts will also have less of an impact than a few very large debts.

 

Your Credit History

Finally, you need to consider your credit history. If bankruptcy wipes your slate completely clean, it could remove enough history that your credit score plummets. On the other hand, consumers with a long positive history will find that the positive items in their credit history will buoy their score somewhat and mitigate the impact of filing for bankruptcy in Georgia.

 

Moving Your Life Forward

It’s important to understand that the factors we discussed above will affect your credit score, but the most important influence is the bankruptcy itself and how recently you filed. The impact of bankruptcy reduces over time, and even just a few years can make a major difference in your credit score.

You should also understand that the situation is fluid. For instance, while a Chapter 7 bankruptcy will stay on your report for up to a decade, the debts included in the bankruptcy will likely drop off your report sooner. In most cases, debts are removed after about seven years, so your credit score will rise as this happens, even before the bankruptcy drops off the report.

For those filing Chapter 13, the situation is reversed. Some debts may show up on your credit report even after the bankruptcy drops off because the seven-year period doesn’t begin until the account becomes inactive and this bankruptcy requires that you repay creditors over three to five years. Only after the end of that period does the account become inactive and the clock begins ticking toward the seven-year expiration mark.

Does that mean you can do nothing but wait for your credit to improve over time? Not at all. There are many things you can do that can help you begin rebuilding your credit.

 

How to Begin Rebuilding Your Credit After Filing for Bankruptcy in Georgia

If you want to boost your credit score after filing for bankruptcy, it’s important to be proactive. Take action as soon as possible. Some of the best ways to start rebuilding your financial standing include the following:

 

• Have Patience – While it is possible to rebuild your credit and bump up your credit score after filing for bankruptcy, it’s important to have patience. It’s a marathon, not a sprint.

 

• Check Your Debts – Make a list of all the debts included in the bankruptcy and then check your credit report after about two months. They should all show “discharged” or “included in bankruptcy”. If not, dispute the entry.

 

• Continue to Check Your Report – Check your credit report regularly and handle any errors as quickly as possible. Get familiar with the dispute process and use this tool to your advantage. Also, remember that if you file Chapter 13, it may be up to five years before some debts show up on your report, and it will not be until the five-year mark that the clock begins ticking for removal.

 

• Rebuild Your Credit – Use a secured credit card or “starter” loan to begin rebuilding your credit as soon as you can. Many different card issuers offer secured cards to help people in your situation and most of them transition to unsecured cards after a period of credit building. However, do not take on more debt than you can afford. You’ll see your scores begin to improve after several years of responsibly using your credit.

 

• Track Your Score – Keep an eye on your credit score as you use your credit responsibly. While you will not see rapid movement, the score should begin to move upward.

 

It’s Time to Find the Relief  You Need

Filing for bankruptcy in Georgia is a legitimate way to find the relief that you need from debt. However, not all types of bankruptcy are the same and they will affect your credit score and your life in different ways. It’s important that you’re able to get your life back on track, but it’s equally important that you make an informed decision regarding the type of bankruptcy you choose and then the steps you take afterward to begin rebuilding your credit score.

At Morgan & Morgan, we’ve worked with consumers and business owners throughout Georgia to help them find relief from their debt burden and we can do the same for you. Contact us today to schedule your no-obligation consultation and to learn more about your options, as well as how we can help.