Credit Repair vs Chapter 7 Bankruptcy

Financial management can be difficult. When people find themselves in a bad situation they may consider filing for bankruptcy as a way to start fresh. However, that may not be the best option for your financial situation. While it’s always recommended that you speak to a professional, there are some options that you can consider on your own before you make any big decisions!

Understanding Your Credit 

Before you can learn when you should consider a Chapter 7 bankruptcy, you will want to have a better understanding of your credit score. Your score is an important factor in your finances. Generally, a score will range from 300 to 850 and impacts your ability to buy a home, get a car, qualify for loans, and more. Your score is calculated by information found on your credit report by the credit bureaus. Your credit report has your credit history information like amounts owed, age of your accounts, etc. There are three main credit bureaus which are Experian, Equifax, and Transunion. 

When an individual has a bad credit score, they can find that life can be much harder to deal with. Your score is a number that lenders use to get a better idea of how you are as a borrower. Each credit bureau (also known as a credit reporting agency) uses the scoring model of their choice. The two popular options are VantageScore and FICO (but the FICO scoring model is more popular). 

What Does it Mean to Have a Bad Credit Score?

According to the FICO scoring model scores between 580 to 669 are considered “fair” while scores below 580 are considered “poor” or “bad”. VantageScore is a little different. They view a score of 601 to 660 as “fair” while scores between 500 to 600 are considered “poor”. Scores that are below 500 are considered “very poor”. 

If you have a bad score then lenders can view you as a subprime borrower which means you likely come with more risk to the lender. This can lead lenders to flat out denying your application or charging you higher interest rates compared to someone with good credit. 

What Factors Impact Your Credit Score?

There are generally five factors that impact your score which include:

  • Payment History
  • Credit Utilization Ratio
  • Age of Your Credit
  • Hard Inquiries
  • Credit Diversity

These factors will be important to keep in mind when you are reviewing ways to handle your financial situation. 

What is Chapter 7 Bankruptcy

When people find themselves in a tough financial position they may consider filing Chapter 7 bankruptcy (also referred to as a straight bankruptcy or a liquidation bankruptcy). There are multiple different types of bankruptcies, also known as chapters. This bankruptcy clears away a variety of unsecured debts. This can be beneficial to people who are struggling to keep up with monthly payments and cannot afford their bills. Oftentimes, it is a last resort for people who want to reset their finances. However, it comes with consequences like impacting your credit score and the possibility of giving up possessions.

How Does This Type of Bankruptcy Work?

The process of a Chapter 7 bankruptcy isn’t just a simple walk in the park. You will need to file it with the court. The court will then place an automatic temporary stay on your current debts. This stay makes creditors stop collecting payments, garnishing wages, foreclosing your property, repossessing your property, etc.

The court will take legal possession of your property then appoint a bankruptcy trustee to your case. A bankruptcy trustee has the job of reviewing your financial situation and assets. They will be the ones to oversee your bankruptcy. Some tasks that a trustee will perform includes selling your nonexempt property to pay creditors, arranging creditor meetings, and more. 

The process generally takes between four to six month from the initial filing. The court will discharge your remaining eligible debts which means you will not be responsible for paying them. 

Pros and Cons of a This Kind of Bankruptcy

Even though this kind of bankruptcy is one of the last resorts that people will do when handling their current situation it can come with some benefits like:

  • A fresh start
  • The ability to keep your future income
  • No limitations on debt
  • Debt can be discharged pretty fast
  • Less or no debt payments

These are some nice benefits but they may not be able to outweigh the drawbacks like:

  • You can’t file for Chapter 7 if you make too much
  • Your credit will likely take a hit
  • It can’t get rid of all unsecured debts
  • You may lose property
  • It won’t erase the debt for others like cosigners

What is a Bankruptcy Attorney?

Since a bankruptcy involves filing with the court, you may benefit from getting a bankruptcy attorney. A good bankruptcy attorney will need an overview of your case so that they can provide advice on available options, help with paperwork, and represent you when the case goes to court. 

Is There Any Way to Avoid the Bankruptcy Process?

Besides bankruptcy, people can handle their debt and credit standing in other ways. Popular options that people consider include:

Credit Repair

This is the process of fixing a poor credit standing. People can have a bad credit score for plenty of different reasons. Repairing credit can either be done on your own or with the help of a professional agency like a credit repair company. 

Credit Repair on Your Own

If you aim to repair your credit on your own you can do so through a variety of different ways. First, you will want to get into good habits. Handling your debt and credit utilization ratio first will be key. You will want to make sure that you pay your bills on time every month they are due, get your credit usage (credit utilization ratio) down to below 30%, etc. 

Besides getting into good habits, you may want to dispute any inaccuracies found on your credit report. You can do this by getting a free copy of your credit report (you can get a free one every year). After reviewing your credit report you will want to find any inaccurate information. Common information that can be disputed includes identity errors, inaccurate account information, and more.

Help from a Credit Repair Company

A credit repair company is an organization that can help consumers handle the dispute process. They do not provide any service that a consumer cannot do on their own. However, they advertise that their experience and knowledge makes the dispute process easier to handle and saves the consumer time and effort. However, these credit repair companies can be costly, especially for a service that you can do on your own. 

Debt Settlement 

Also known as debt relief or debt adjustment, debt settlement is the process of resolving debt that has become delinquent. This can be a cheap and fast way to handle your debts which ultimately can improve your credit over time and help you handle your debts without having to turn to bankruptcy as a solution. Third party companies offer this option and they would be the ones to deal with creditors in accepting a reduced amount of debt that must be repaid. This option also isn’t a guarantee because creditors may decide not to agree to the negotiation process. 

Commonly Asked Questions

When you are in a tough financial spot, you may have questions about how you can improve your situation. Luckily, others in similar situations have had questions as well that may be able to provide you some more insight!

How Can Filing Bankruptcy Impact Your Credit?

Circling back to earlier in the article when we talked about factors that impact your credit score, payment history was at the top of the list. If you had so much unsecured debt that you needed to file for bankruptcy, that item will be on your credit report. Filing bankruptcy will stay on your credit report for up to 10 years until it falls off. This information will also be found on your public record which can sway lenders towards disqualifying you as a borrower!

A myth that many consumers may believe is that this kind of bankruptcy will be able to completely clear their credit report, but that’s not true. Instead, those items will still be found on your credit report until the bankruptcy falls off after up to 10 years. 

Credit Repair vs Chapter 7 Bankruptcy: Which is Better?

You will want to get in touch with a professional when determining which option would be better for your current situation. However, credit repair can be done on your own for free and will not negatively impact your credit. 

Some people may find themselves in such a difficult financial situation that they need to turn to a Chapter 7 bankruptcy in order to get the fresh start they need to begin from scratch. However, that comes with repercussions like the impact to your credit score, repossession of property, etc. 

How Long Does it Take to Rebuild Credit After Chapter 7 Bankruptcy?

Again, this varies based on the borrower. However, people can generally assume that the process to rebuild credit after this kind of bankruptcy will likely take between two months to two years for your score to begin improving. 

What’s the Difference Between Your Credit Score and Credit Report?

Understanding credit can be difficult, that’s okay! It’s important that you understand the difference between these terms. Your credit report has information about your credit history like the amount you owe, your account information, etc. This credit report is what credit reporting agencies use to calculate your credit score. 

Is the Bankruptcy Filing Process Easy?

Even though it may be a daunting task, the bankruptcy filing process is pretty easy. It can be even easier when you have the help of a bankruptcy attorney. You may benefit from getting in touch with one before you start the bankruptcy filing process so that you can be sure that this is not only the right decision but that you handle it responsibly. 

Overall

Between credit repair and a Chapter 7 bankruptcy, you will want to confirm your choice with a professional. Credit repair can help people get rid of inaccurate information found on their credit report and improve their credit. However, it cannot get rid of debts that rightfully belong to the consumer. 

On the other hand, Chapter 7 bankruptcy is an option that can provide consumers a fresh start but involves a whole process with the courts. It typically comes with drawbacks like a negative impact to your credit score and the repossession of property. 

There are ways that you can handle your credit situation yourself like with debt settlement (also known as debt relief). If you find yourself in a tough financial situation you should get in touch with a credit counseling agency. You can provide them details about your current situation and a credit counselor can help you come up with a plan of action. Your situation may not be as hopeless as it feels!

Article References

https://www.consumerfinance.gov/ask-cfpb/what-is-a-credit-score-en-315/

https://www.forbes.com/advisor/credit-score/what-is-a-bad-credit-score/

https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/

https://www.experian.com/blogs/ask-experian/what-is-chapter-7-bankruptcy/

https://www.findlaw.com/bankruptcy/chapter-7/reasons-to-file-for-chapter-7-bankruptcy-instead-of-chapter-13.html

https://upsolve.org/learn/pros-cons-filing-chapter-7-bankruptcy/

https://www.debt.org/bankruptcy/do-i-need-a-bankruptcy-attorney/

https://www.investopedia.com/terms/credit-repair.asp

https://www.investopedia.com/personal-finance/debt-settlement-cheapest-way-get-out-debt/

https://www.consumerfinance.gov/ask-cfpb/what-are-common-credit-report-errors-that-i-should-look-for-on-my-credit-report-en-313/

https://www.lexingtonlaw.com/education/credit-repair-companies

https://www.experian.com/blogs/ask-experian/how-does-filing-bankruptcy-affect-your-credit/

https://www.transunion.com/blog/credit-advice/how-long-does-bankruptcy-stay-on-credit-report

https://www.nolo.com/legal-encyclopedia/can-debts-discharged-bankruptcy-appear-my-credit-report.html

https://www.forbes.com/advisor/credit-score/rebuilding-credit-after-bankruptcy/

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