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How does bankruptcy affect a person's credit rating?

Most people in Eastern Tennessee contemplating bankruptcy are aware that they have credit scores that are used by potential lenders to determine whether the person should be loaned money and what interest rate they should be given. The uncertain piece of the puzzle is the effect the bankruptcy filing has on a person's post-bankruptcy credit score.

In the United States, three credit rating bureaus keep track of how well individuals pay their debts. Each person in the system is given a score based upon their promptness in repaying their loans. A credit score of 780 is deemed to be excellent, and a score of 680 is deemed to be fair. The maximum score is 900. Most lenders would use a score of 780 to lend money with little or no question and give a low interest rate.

In 2010, the Fair Isaac Corporation, a firm that provides information to credit ratings agencies and lenders, published a study of the effect of bankruptcy on credit scores. A person who enters bankruptcy with a credit score of 780 is likely to see that score drop to about 540 after the bankruptcy is concluded. A person who begins bankruptcy with a score of 680 is likely to see that score drop by 150 points to about 530. People with lower credit ratings will see a lower percentage drop because they are closer to the bottom when the bankruptcy process begins.

Credit scores are not permanent. A Chapter 13 bankruptcy credit report expires seven years after the discharge is entered. A Chapter 7 bankruptcy credit report expires 10 years after the date of discharge. Those who have undergone a bankruptcy discharge can begin to fix their credit scores by taking out small loans and making timely payments. Other methods are available to improve a credit rating, and a person can climb back into the fair category in as little as 12-18 months after the discharge.

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