Student Debt Solutions

Smith Law Group Blog

Sharing thoughts on the latest news about student loan debt relief and bankruptcy.

Who Wants to be a Bankrupt Debtor?

Sometimes in life, people need a lifeline, like those in the game show “Who Wants to be a Millionaire?”. For those struggling with debt, bankruptcy can be a legal lifeline providing much needed debt relief. Bankruptcy allows courts to release consumers from the liability of their debts, whether they be credit card debt, mortgages, or even private student loan debt (yes, it is dischargeable).

What is Bankruptcy?

Bankruptcy is a legal process by which the court and the court trustee examine the assets and liabilities of a debtor who is struggling to pay the bills that are due. The court and trustee then decide whether or not to discharge those debts. This means that they decide whether the debtor will be legally required to pay these debts moving forward or, rather, have them discharged.

Bankruptcy exists to give those in dire financial situations the ability to start over. It is a legal proceeding by which an individual or business gets an economic “second chance,” independent of whether the reasons for financial crisis were self-inflicted or just due to bad circumstances.

Does Bankruptcy Affect My Credit?

Yes. Bankruptcy affects your credit score and will typically decrease your credit score anywhere from 160-220 points. That can make things difficult moving forward for rent credit reports, or to qualify for home, auto, or credit loans. However, time also heals bankruptcy wounds. While we have seen analysts suggest that you can get your credit score back up as quickly as 6 months to one year post-bankruptcy, a more conservative view on a return to better credit scores would be two to three years, if you play your cards correctly. The following are some ways in which you can improve your credit score post-bankruptcy.

  1. Stay on top of your credit score.
    Ensure that your bankruptcy discharges are reported properly and are reflected on your credit reports accurately.

  2. Reestablish credit quickly.
    Start building up a new positive payment history through secured credit cards an auto loans, and by ensuring that your payments on debt moving forward are always on time.

  3. Keep old accounts open and active.
    When possible, keep your older accounts open and active. This gives you a longer credit history and a bit of a bump in your credit score.

  4. Stay out of debt.
    Start building better spending habits and keep your credit card balances under 30% utilization.

  5. Monitor your bankruptcy timeline.
    Ensure that at the end of 7 years (Chapter 13 bankruptcy) and 10 years (Chapter 7 bankruptcy) that the bankruptcy and all items related to it are removed from your credit reports.

Can Bankruptcy Help My Credit Score?

For those who find themselves in a scenario where bankruptcy is necessary, this may not be the first question asked, however, it should be considered. Bankruptcy can provide short-term positive credit score side effects such as getting rid of excessive red marks on your credit reports due to delinquent payments. It will also most likely improve your debt-to-credit ratio on those very same credit reports. Long-term, it gives you the opportunity for a second chance to build good credit and improve borrowing and spending habits, as well as dream of financial freedom once more.

Obviously, nobody aims to need to go through the difficulties that lead to bankruptcy. But thank goodness these options exist for those who really need it.

Should you or someone you know need to consider a Chapter 7 or Chapter 13 bankruptcy, or possibly already went through bankruptcy but still need to get the courts to acknowledge that those pesky student loans were already discharged, please feel free to contact Smith Law Group. Smith Law Group exists to help those who need these second chances.