Small Business Law

There are many legal pitfalls throughout the life cycle of a small business. You need sound legal advice during these periods. As your attorney, I focus on your needs while keeping your goals and expectations in mind.

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Bankruptcy Attorney

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Bankruptcy’s Effect on Your Credit

When considering bankruptcy, many people worry about the effect it will have on their credit score. They may even decide to put off filing for bankruptcy out of fear that their credit score will be so detrimentally affected that they will be unable to buy a house or car or even get a credit card for years, possibly decades, to come. This week’s tip is devoted to dispelling these fears and giving a realistic picture of the effect a bankruptcy filing has on an individual’s credit score.

Your credit score is determined by comparing your credit to those of other people in the general population. Credit agencies look at 5 basic categories in determining credit worthiness. These categories are listed here in descending order of importance:

  1. Payment History – refers to payments being made on-time or late, judgments, bankruptcies, collection accounts, and so on.
  2. Outstanding Debt – examines the number of outstanding balances, average balance, and ratio of total balances to total credit limits on revolving debt (i.e. credit cards).
  3. Credit History – refers to how long you have had your oldest account.
  4. Pursuit Of New Credit – examines when and how many inquiries and new accounts there are.
  5. Types Of Credit In Use – refers to the number of reported accounts in the various credit card categories (bank cards, travel & entertainment, and so on).

On occasion, there is the rare individual with stellar credit who files for bankruptcy. Undoubtedly, a filing will have an effect on such a person’s credit, thereby making it more difficult for him or her to borrow in the near future. In most cases, however, by the time a person files for bankruptcy, his or her credit rating is probably in the dumps. For this reason alone, a bankruptcy filing will likely have little or no effect on an individual’s credit report. Sure, the word “bankruptcy” will appear on the credit report for some years into the future, but that alone will not prevent you from getting a credit card or a loan.

What many people don’t realize is that bankruptcy often helps an individual’s credit score over the long run. Because the money previously used to pay creditors and collection agencies is freed up, you may be a better candidate for financing than you were prior to the bankruptcy filing. Credit card companies often unscrupulously target individuals who recently filed for bankruptcy with offers for new credit cards. But beware, credit card companies are not your friends. While having a credit card is important to rebuilding your credit rating, interest rates are often high and some cards come with strings attached, such as the need for a security interest.

Improving your credit rating should not be a reason to file for bankruptcy. At the same time, you should not let your concerns over bankruptcy’s effect on your credit report paralyze you from taking a necessary step on the road to financial recovery.

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