One of the ways that creditors try to scare people away from filing a bankruptcy is by claiming it will “destroy their credit.” Admittedly, filing a bankruptcy will not improve your credit rating or FICO number. Of course, you are not filing a bankruptcy in an attempt to improve your credit; you file to eliminate overwhelming debts or restructure your debts to a manageable amount.
Creditors know, before your file, that your financial situation is grim. They are the ones who report the missing or late payment to the credit bureaus. While a bankruptcy will cause a drop in your credit score and make credit more expensive, it will not eliminate all chance of your ever obtaining a mortgage, credit card or another loan. In fact, some individuals will receive offers for new credit, before they have completed their existing bankruptcy.
Remember, creditors know you cannot file bankruptcy right away after receiving a discharge. The amount of time varies depending on which chapter you filed under and the period of time since your discharge. They know they will be able to collect on your account, plus they are charging you a higher interest rate to account for their potential risk.
While a Chapter 13 will remain on your credit report for seven years, but if you make all of your Chapter 13 plan payments on time, it is likely that that payment history will demonstrate that you have recovered from your financial difficulties and are a better risk. Your mortgage may come with a higher interest rate, but given today’s historically low rates, that rate could still be reasonable.
With a mortgage, due to the “security” of the underlying property, the risk to a lender is less than for credit cards, which provide a lender with little security. Additionally, even if your initial rate is somewhat high, with a good payment history, there is always the possibility of refinancing to a lower rate in the future.
