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How badly will my NJ bankruptcy affect my credit?

One question I get asked a lot is what bankruptcy will do to someone's credit.   This is because there are a lot of myths out there about what happens.  People think they will have bad credit for 7 (or 10) years no matter what.

My answer used to be that it is the worst thing you can do.  It will trash your credit, and  for that reason should always be considered as a last resort, but it is not like breaking a mirror, in that the period of time you will be affected by it is not the same for everyone; it depends on what you do to repair it.

However, with the rise and establishment of the FICO score, and what we are learning about how it is calculated, this answer has changed somewhat.

Your Credit (FICO) Score

Years ago, an outfit called the Fair Isaac Company (FICO) established a "secret formula" that creates a score much like those from high school SATs (300 to 850) that rate your credit worthiness.  The scores are based on the contents of your three credit histories (Equifax, TransUnion, and Experian), and as such can vary a bit with the content of each, so it is best to be aware of all three.

If you have a high score prior to bankruptcy, it will drop considerably after you file.  However, if you are in default on your credit cards and have a low score due to a lot of negative marks on your report, the drop will be more modest.  It can also be affected by the number of debts that are discharged.

What Goes into It

Another thing to bear in mind is exactly what information goes into the calculation of your score.  As 30% of the score is based on amount of debt owed, the ironic thing is that some people may experience a bump up in their score, as debt balances on their reports drop to zero with their discharge.

Then another 35% is based on your payment history, so the next year or two after you file can be critical to raising your score.  Make sure those mortgage and car payments are made on time every month.

You might also get a secured credit card (a card that requires a security deposit and has a credit limit that is a multiple of same) and pay it off every month.  Usually, after about a year or so the bank will convert it to a regular card.  There are all sorts of ways to improve your score, so the more proactive you are in doing so, the faster you will get back up on your financial feet.

Bankruptcy, as I said, is a last resort, but it can often be the best way to get out from under crushing debt. Find out what is true and what isn't about credit, and take charge of your life after you file by taking affirmative steps to rebuild your score as quickly as possible.  That is the fastest and best way to get the fresh start in life that you need!

What Should I Do?

If you live in South Jersey and are considering filing bankruptcy, please feel free to call my office at 856-432-4113 or contact me through this site for a free consultation in my Woodbury office to discuss your case.

If you are looking for more information about bankruptcy, then download my free book,Top Questions People Ask About Filing Bankruptcy in New Jersey.

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