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How Chapter 7 will affect one's credit report

For Tennessee consumers considering filing for personal bankruptcy, the aftermath of the process is often a mystery. One issue that is often misunderstood is the changes that will be made to one's credit reports. After a Chapter 7 bankruptcy filing, many of the accounts currently listed within the credit reports created by the three main credit bureaus will change. Understanding those changes can help consumers determine the best time to file.

One example lies in the way that accounts are listed. When a filer has gone through a divorce, these matters can become complicated. For example, if a spouse has a home equity loan listed on their credit, but then goes through the bankruptcy process and has that debt discharged, the account should be changed to show up as 'discharged.' All liability for the debt is eliminated. Any future payments made on that account should not be listed on the filer's credit report, or factored into his or her score calculations.

However, the matter does not end there. Even in cases in which the former spouse received the home and the home equity loan was discharged through bankruptcy, the filer could still face credit damage. This can occur if the former spouse allows the home to go into foreclosure. While the filer has no claim to the property or liability for making the payments, his or her name is still on the loan, and cannot be removed unless the former spouse refinances the property. Foreclosure actions can remain on the filer's credit report for a long time, even if that party has no financial liability connected to the home and after a Chapter 7 bankruptcy has wiped out the majority of their other debt.

This is just one example of a topic that can affect one's decision to file for Chapter 7 bankruptcy. For Tennessee consumers who are concerned about their credit scores, it is undeniable that bankruptcy will cause a quick and significant decrease in scores. However, it is equally true that with a concerted effort, consumers can rebuild their credit to level exceeding those attained prior to filing, and can emerge from the process with a much stronger financial footing for future success.

Source: Fox Business, "Will HELOC Stay on Credit Report Post-Bankruptcy?" Justin Harelik, May 7, 2013

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