A common myth concerning the bankruptcy process is that it will ruin your credit forever. This is simply not the case. Consumer credit reports follow an algorithm that is constantly changing. An actuary firm called Fair Isaac Corp employs mathematicians to create formulas that are geared towards helping credit providers find the most qualified customers. There are some general constants that apply to credit reports, and these constants translate into actions you as a consumer can take post-bankruptcy to help raise your credit score.
The filing of a bankruptcy case itself will not permanently damage your credit score. The bankruptcy filing itself is noted on the credit report as a "public record" filing for up to 10 years. The debts that are discharged get marked at "discharged in bankruptcy" when the Court issues its discharge order.
When the Bankruptcy Court issues the Discharge Order, which at the soonest is 90 days after the case is filed, it is usually noted on your credit report within thirty (30) days. This means that all the negative points assigned to past-due payments, high balances, judgments, evictions, foreclosure, etc. no longer have any negative effect on the credit score. The Debtor needs to have something active and paid timely post-discharge to help the credit score rise to a level over 640, which is about where you need to be to qualify for a decent auto loan in the future. It would not be impossible to get your score back up to
700 about 6 months to 12 mos after you receive the Discharge, so long as you pay attention to it, and get 1 or 2 new debts on there that you pay off each month.
Entering into a reaffirmation agreement with an auto lender and a mortgage lender are common ways for a bankruptcy debtor to immediately begin the process of increasing the credit score post-bankruptcy discharge, in the context of a Chapter 7 case. A reaffirmation of debt such as an auto or car loan will keep the debtor's personal obligation under the terms of the promissory note from being discharged. This results in the reaffirmed debt remaining on the debtor's credit report as an active debt. So long as the debtor continues to pay the reaffirmed debt, there will be a normal positive effect on the credit score going forward. Of course, if the debtor fails to make payments, this will negatively impact the credit score. Reaffirmation of debt in a Chapter 7 bankruptcy takes careful consideration, and should only be considered in the case where the terms of the loan being reaffirmed are reasonable. In some cases, the lender will agree to lower the interest rate and in rare cases, wipe off some of the principal balance of the debt.
There is a good summary of all this available at creditkarma.com or at www.experian.com Dave Ramsey has a good book on the ins and outs of consumer finance, as does the
"For Dummies" series available on amazon.com ( title: Consumer Finance for Dummies).