The Truth About Chapter 7 Bankruptcy and Your Credit Score

With so many people struggling with their credit card debt, all kinds of forms of debt elimination tactics are popping up. The methods range from the protected (bankruptcy) to the sketchy (some debt settlement options) to the straight forward (direct negotiation and debt forgiveness).

The Washington Post writes about the rise in credit card modifications. In these cases, a credit card company may reduce the interest or other terms of the debt in the hopes of getting some money back.

They may forgive some debt, but typically they cut the interest rate while closing the account. This prevents new charges from being added to the card, and giving the cardholder a chance to make a payment on the principal debt, not just the interest.

Many people see this as a way to avoid bankruptcy. However, if you think that a credit card modification will save your credit score, The Washington Post says think again:

“And borrowers can pay a price if they’re granted a modification. Forgiven debt could be taxable and can tarnish the borrower’s credit report for up to seven years. If the bank reports to credit bureaus that it forced the borrower to close the account, that, too, could damage the credit history, jeopardizing chances for future loans. Finally, if a borrower has a lot of debt, a closed account could hurt a credit score. If the borrower has to give up his card, then a key figure used by lenders to determine creditworthiness — the ratio of outstanding debt to available credit — can soar, harming the credit score even further.”

If you don’t think Chapter 7 bankruptcy will work for you, or if you’re concerned about it having a lasting, negative impact on your credit score, this article may cause you to think again.

The truth: Your credit score is affected by many actions. Filing bankruptcy, debt settlement, debt modification, closing a credit card, receiving debt forgiveness and not paying your bills on time can all affect your credit score.

Concern for your credit score shouldn’t keep you from taking the action needed to get your credit card debt under control, whatever that action may be.