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Bankruptcy and credit scores

When considering bankruptcy, making the decision between Chapter 7 and Chapter 13 personal bankruptcy may be a difficult choice. The key factor in deciding between the two is the filer's current financial situation. If a debtor is so far in debt that they cannot possibly make payments, then Chapter 7 may be the best fit. If the debtor is employed but has fallen behind on bills, then Chapter 13 may be a better option.

Another concern about bankruptcy is the effect it can have on a person's credit score. Bankruptcy in general can stay on a person's credit report from seven to 10 years. Chapter 7 bankruptcy, which discharges most unsecured debts, including credit card debts, stays on a credit report for 10 years. Unless the filer's credit score is already extremely low, the score will suffer dramatically following bankruptcy.

Chapter 13 bankruptcy, in which the court approves a partial repayment plan, can be subjectively better, depending on who is viewing the report. Someone who files Chapter 13 is still making some effort to repay their debts and some agencies find it more palatable than Chapter 7. However, both bankruptcies are viewed the same by FICO, a leading company that lenders go to when assessing a person's risk. Research has found that bankruptcy filers, regardless of which chapter they file, have about the same level of future creditworthiness.

Regardless of which chapter a debtor decides to file, rebuilding credit is the same. After a couple years, lenders will be more willing to extend credit. Making small, manageable purchases using a credit card and then paying the bills in full and on time is an easy way to rebuild credit. Saving for retirement and emergencies is also essential so that credit cards will not be a safeguard.

Source: Credit Card Guide News, "Bankruptcy Choices: Chapter 7, or Chapter 13?" Erica Sandberg, Jan. 12, 2012

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