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Filing a bankruptcy will affect your credit. However, for most people contemplating bankruptcy, their credit score has already suffered due to the circumstances that have caused them to consider bankruptcy in the first place. Generally a bankruptcy case will appear on credit reports for 10 years after it has been discharged. Debts that have been discharged through bankruptcy should be reported as "Discharged in Bankruptcy."

One benefit of filing a bankruptcy is that it will provide a clean slate to clear off the negative treatment that comes with high balances, late payments, and accounts in collections. Since nearly 1/3rd of a credit score is based on a person's debt-to-income ratio, the bankruptcy discharge greatly helps that area of the credit score.

Depending on your circumstances, a credit score normally improves within a year or two of getting a discharge. If a debt is "reaffirmed" in a bankruptcy (e.g., a car or home loan that is kept) and you continue to pay on that debt after a bankruptcy, the creditor will continue to report the timeliness of payments after bankruptcy, and that can aid in boosting the credit score after completion of the bankruptcy. Reaffirming secured debt is one way to improve your credit score more quickly.

Another strategy to improve the post-bankruptcy credit score is to obtain a credit card with a small credit limit or a secured credit card. By making small purchases and paying them off on time and in full each month, you will have positive treatment on your credit report that will help you to rebuild your score. To improve the credit score you have to play the game-you have to use credit each month and pay off the balance in full on time. If you only pay cash for all purchases after bankruptcy, how will a banker know that you know how to use credit responsibly?

One issue that can sometimes arise following a bankruptcy is that some debts on a credit report may be inaccurately listed and will not be reflected as "discharged in bankruptcy." This happens when a credit report is not updated after the bankruptcy discharge. Even though the debt has been discharged in the bankruptcy and there is no legal obligation to pay it, the credit report may not reflect the fact that it was discharged. Our firm sends a letter to our clients at the time of their discharge recommending that they review their credit report for inaccuracies and we provide the address of all three credit bureaus so that our clients can write a letter to the credit bureaus asking for their credit report to be updated.

Under the Fair Credit Reporting Act, inaccurate credit reports can be corrected. The Fair Credit Reporting Act allows a person to challenge the accuracy of credit reports and furnish proof to be considered in making corrections. You have the right to one free credit report each year, and you can apply for that free credit report from each of the three major credit bureaus: Equifax, Experian, and TransUnion.

To dispute inaccurate credit information, you must contact the credit reporting agency with information showing the inaccuracy and they have 30 days to investigate. You should also contact the information provider (creditor).

By:  David Hepperlen, Attorney at Law