The bankruptcy process can be confusing. Those who are struggling with debt will often be unsure about their options, the steps they will need to take to receive relief, and the short-term and long-term effects of a bankruptcy filing. Credit scores are one issue that can be especially difficult to understand, and in many cases, debtors will be worried that filing for bankruptcy will affect their ability to obtain loans or buy a house in the future. Our firm works to provide people with answers to the questions they have about these issues.

How Much Will Bankruptcy Lower My Credit Score?

The effects of bankruptcy on your credit score will usually depend on your score prior to filing. If you had a good credit score that was higher than 700 points, bankruptcy will likely result in a significant decrease of 100 points or more. If you had a lower credit score in the 500s or 600s, bankruptcy will likely cause your score to drop, although the decrease may not be as significant. However, if you are concerned about your credit score, it is likely that it has already been affected by the issues that are causing you to consider bankruptcy, such as missed payments on loans or credit cards. By filing for bankruptcy, you can regain financial stability, allowing you to begin rebuilding your credit score.

How Long Will a Bankruptcy Appear on My Credit Report?

Your credit report includes a variety of information about the loans you have taken out, the payments you have made, and how you have used credit in the past. A bankruptcy filing will appear on your credit report, and it may be considered by creditors when they decide whether to approve you for loans or credit cards in the future. Since a Chapter 7 bankruptcy usually indicates that a person is a higher credit risk, it will remain on your credit report for 10 years. A Chapter 13 bankruptcy and other bankruptcy references, such as actions taken against you by collection agencies, will stay on your credit report for seven years.

There are a variety of different types of debts that can affect a person or family. In some cases, a person may receive assistance from a friend or family member when they sign a loan. For example, a person may be looking to purchase a new car, but if they do not have a significant credit history, they may not be able to obtain a loan on their own. Having a parent or another person who has a high credit score cosign the loan will provide the lender with a better guarantee that the debt will be repaid. However, if the person experiences financial hardship that affects their ability to make ongoing payments on the loan, the co-signer may be obligated to repay the loan. While bankruptcy may be an option that can help address these debts, it is important to understand how a co-signer will be affected in these cases.

How Chapter 7 and Chapter 13 Bankruptcy Affects Co-Signers

When a person cosigns a loan, they will be providing the lender with the guarantee that ongoing payments will be made. If the primary debtor defaults on the loan, the lender may seek repayment from the co-signer, and this may include contacting them and asking them to make payments or pursuing a legal judgment to recover the balance owed on the loan.

If the primary debtor chooses to file for bankruptcy, this may affect a co-signer differently depending on the type of bankruptcy that the person pursues. In a Chapter 7 bankruptcy, a debtor will discharge their debt, and they will no longer be obligated to repay the amount owed to the lender. However, this will not eliminate the co-signer’s obligation to repay the debt, so the lender may seek to recover the remaining amount owed from the co-signer. In many cases, a debtor will also include their co-signer in a Chapter 7 filing, which will discharge any obligations they had toward that person. Depending on the person’s ongoing relationship with the co-signer, they may still choose to make informal arrangements to repay the person or make up some of what is owed, even if they no longer have a legal obligation to do so.

If you are a homeowner who has defaulted on your mortgage payments or are experiencing other issues that have affected your ability to repay your debts, you may be considering bankruptcy. Filing for bankruptcy will allow you to halt foreclosure proceedings as you determine your options. If you plan to pursue a Chapter 7 bankruptcy, this will allow you to discharge a number of different types of debts, eliminating the requirement to repay what you owe and ensuring that you will receive a fresh financial start. However, the discharge of your mortgage loan will allow your lender to proceed with a foreclosure and take possession of your home. To prevent this, you may choose not to include your mortgage in your bankruptcy, and if you continue making payments while also making up any past-due payments or related fees, you may be able to maintain ownership of your home. 

In these situations, mortgage lenders will often ask homeowners to reaffirm their loans and agree that they will continue to be liable for the debt that is owed. By understanding how reaffirmation agreements are used and how they may affect you in the future, you can determine whether signing this type of agreement will be a good idea.

Benefits of Reaffirmation

Reaffirmation agreements primarily benefit lenders, since they ensure that a debtor will be liable for the debts that are owed. While bankruptcy will discharge a debtor’s obligation to pay debts, it will not remove the lien on a home, and a lender will have the right to take possession of the property. If you agree to reinstate the debt, you can continue to own your home as long as you remain current on your mortgage payments. Since payments made toward a reaffirmed loan will be reported to credit agencies, this may help you rebuild your credit after bankruptcy.

Most Americans have some form of debt, and in many cases, a person’s most significant debts will be the balances on credit cards. While these debts may be manageable, and a person may be able to make ongoing payments as they work to pay off the balances owed, there are some situations where paying off these debts may be difficult or impossible. In cases where a person or family is experiencing financial difficulties and struggling to make credit card payments while also paying other debts and covering regular expenses, they will want to determine their options for debt relief. 

Options for Paying Off, Reducing, or Eliminating Credit Card Debts

When a person owes large amounts of money to credit card companies and other creditors, they may be able to take steps to achieve financial stability by reducing their payments or eliminating debts altogether. Some options for doing so include:

• Effective payment strategies - By taking stock of their financial situation and determining whether they can reduce expenses, a person may be able to determine how to make affordable payments that will allow them to pay off what is owed. By making payments that are larger than the minimum amount owed each month, they can make a dent in the total balance and work toward eliminating their debts. However, this may not be an option for those who are already struggling financially or who have debts that are too large to pay off in this manner.

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There are multiple types of debts that can cause a person and their family to experience financial difficulties. Tax debts can be especially problematic since debtors are not always able to eliminate these debts through bankruptcy. Taxpayers will want to understand their options in situations where the IRS or a state takes action to collect taxes that are due. By understanding how IRS tax levies and tax liens are affected by a bankruptcy case, a person can make sure they take the correct steps to receive the debt relief they need.

What Is a Tax Levy?

When a taxpayer owes taxes, the IRS may take multiple different types of actions to collect these debts, and these actions are known as tax levies. The IRS may contact a person’s bank and seize the funds in an account, or it may put an order in place to garnish the person’s wages. However, if a taxpayer files for bankruptcy, the automatic stay in their case will apply to tax levies, and the IRS will be required to cease these collection activities while the case is ongoing.

In some cases, bankruptcy may be able to eliminate tax debts. Generally, tax debts are dischargeable if at least three years have passed since a tax return was due and at least two years have passed since the tax return was filed. A taxpayer must have filed all required tax returns for the previous four years. If a person files for Chapter 7 bankruptcy, applicable tax debts may be discharged once their case is completed. If they file for Chapter 13 bankruptcy, tax debts may be included in their repayment plan, allowing them to pay off what is owed along with other debts.