How Does Chapter 7 Bankruptcy Affect Your Credit in New Jersey?


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Bankruptcy is a legal process that, when completed successfully, results in the elimination of various debts. Chapter 7 bankruptcy, which is also known as “straight” bankruptcy or “ordinary” bankruptcy, is the most common type of bankruptcy in New Jersey. Filing Chapter 7 will cause a temporary drop in your credit score, but for many debtors, it is still far more beneficial to file bankruptcy than to continue going deeper into debt. With diligence and discipline, you can start to rebuild your credit score soon after filing Chapter 7 bankruptcy. Keep reading to hear Cherry Hill bankruptcy attorneys discuss how Chapter 7 impacts your credit score, and how long Chapter 7 remains on your credit report after you file bankruptcy in New Jersey.

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How Does Filing Chapter 7 Affect Your Credit Score in New Jersey?

A credit report is a detailed compilation of financial information that lenders use to assess financial risk. One of the most important features of your credit report is your credit score, a three-digit number that reflects your creditworthiness. Your credit score is based on variables like:

  • How frequently you have made full and timely payments on mortgages, student loans, utility bills, and other financial obligations.
  • The length of your credit history.
  • The number of accounts you have, and when they were opened.
  • Whether a home you owned has ever been foreclosed on.
  • Whether you have ever filed for bankruptcy, including both Chapter 7 and Chapter 13.

Your credit score may be anywhere between about 300 points and 850 points, depending on which credit scoring model is being used. While there are variations between different credit scoring models, the following rough guidelines give you a general idea of how credit scores are categorized:

  • Poor Credit/Bad Credit – 629 points and under
  • Fair Credit/Average Credit – 630 points to 689 points
  • Good Credit – 690 points to 719 points
  • Excellent Credit – 720 points or more

If you’ve spent months or years struggling with unpaid bills or delinquent loan payments, you likely have fair credit or poor credit. However, you aren’t alone. According to a 2015 survey by Experian – one of the three major credit reporting bureaus, along with Equifax and TransUnion – almost one third of Americans have a credit score of 600 points or lower.

The bad news is that filing Chapter 7 in Cherry Hill will cause your credit score to drop. The good news is that:

  1. The reduction is only temporary. You can start the process of rebuilding credit almost immediately after you file bankruptcy, though it may take one to several years before you have good credit again. The more consistent you are about paying your bills in full and on time, the sooner you will start to see improvements. One helpful tip for rebuilding credit after bankruptcy is to obtain a secured credit card, which uses money you deposit as collateral.
  2. The lower your credit score is now, the less it will drop due to bankruptcy. If you have good credit when you file bankruptcy, your credit score may drop by over 200 points. However, for someone with a lower credit score, the reduction will likely be closer to about 130 points.
  3. Taking no action will make the problem worse. If a long struggle with unmanageable debt has led you to consider bankruptcy, it is likely that you currently have poor credit. By wiping out many of your debts, including medical debts and credit card debts, Chapter 7 bankruptcy frees up more financial room, giving you greater ability to start making full and timely payments which build better credit. If you do not take any action, you will continue to fall behind on your obligations, and your credit score will continue to decline. Even if bankruptcy is not the appropriate action, other alternatives to bankruptcy may help you get debt relief. Our bankruptcy alternatives lawyers in New Jersey can help you explore a range of options for paying off or eliminating debt.

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When Does Chapter 7 Bankruptcy Come Off Your Credit Report?

Chapter 7 bankruptcy will stay on your credit report for a period of 10 years. The 10-year period begins on the date you file for Chapter 7 bankruptcy, not on the date your case is discharged by the bankruptcy court. (For reference, however, Chapter 7 cases are discharged in anywhere from about four to six months.)

Many people think that because Chapter 7 stays on their record for 10 years, they will not be able to get any loans for 10 years. Fortunately, that is not necessarily true.

Depending on factors like your credit score and the circumstances that led to your bankruptcy, you may become eligible for certain loans in as little as one to two years following Chapter 7 bankruptcy – including mortgage loans. For example, you may qualify for a Federal Housing Authority (FHA) loan, which is a mortgage that’s insured by the federal government. The minimum FICO score required to be eligible for an FHA loan is currently 580.

Typically, there is a two-year post-bankruptcy waiting period for eligibility for an FHA loan. However, if you can prove that you had to file bankruptcy due to no fault of your own, you may be able to slash the waiting period in half, making you eligible a mere 12 months after bankruptcy.

Keep in mind that you will have to pay higher interest rates the lower your credit score is. If you are willing to wait until your credit improves further, you may be able to get a better deal.

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While bankruptcy can put a dent in your credit score, the long-term benefits are often worth the temporary setback. Not only will you be released from many of your debts, you will also gain protection from debt collectors, opportunities to protect your property from repossession, and the peace of mind that comes from relieving financial hardship. Once your dischargeable debts have been eliminated by Chapter 7 bankruptcy, you will be in a stronger position to build good credit for your future.

To learn more about whether bankruptcy is right for you, call the Cherry Hill Chapter 7 attorneys of Sadek and Cooper Law Offices, LLC at (856) 354-3310 for a free consultation. We will keep your information private.

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