Sonia Hickey – Financial challenges can be frustrating, especially considering options like bankruptcy. Knowing the effects of bankruptcy on your credit score is essential before making any decisions that impact your future.
Here’s a breakdown of how different types of bankruptcy affect your credit and the steps to improve your credit score if you file for bankruptcy.
The Basics: Bankruptcy and Your Credit Score
Bankruptcy is not a one-size-fits-all solution. It’s a legal process to provide relief to individuals or businesses facing insurmountable debt, but the specifics can vary greatly depending on the situation.
When you file for bankruptcy, it will likely result in a drop in your credit score. The magnitude of this drop depends on your initial score. If you started with a high credit score, you might experience a more significant decrease than someone with a lower score.
Two Main Types of Bankruptcy: Chapter 7 and Chapter 13
The two most common types of bankruptcy are Chapter 7 and Chapter 13. Knowing the distinction between them is essential, as each has unique implications for your financial future and credit score.
Chapter 7 Bankruptcy
In this scenario, some of your assets are liquidated to pay off creditors. Most remaining debts are discharged once assets are sold and the proceeds divided among creditors.
Chapter 7 bankruptcy remains on your credit report for 10 years.
Chapter 13 Bankruptcy
With Chapter 13, you’ll follow a repayment plan, allowing you to pay back all or part of your debts over 3-5 years. It’s an option for those wishing to retain major assets, such as homes.
This type of bankruptcy will stay on your report for seven years.
For a deeper understanding of which bankruptcy route might be most fitting or to understand the entire process better, Wonais Law, LLC suggests contacting a consulting firm for guidance.
Steps to Rebuild Your Credit Post-Bankruptcy
After a bankruptcy is official, potential lenders might be cautious. Others may be eager. With diligent financial habits, you can regain trust and rebuild your credit.
1. Review Your Credit Report
Secure reports from the primary bureaus and confirm their accuracy, especially details related to your bankruptcy.
2. Consistent Payments
Timely bill payments play a significant role in boosting your credit score.
3. Build Savings
Although savings don’t directly influence your credit score, they show financial responsibility and decrease dependency on borrowing.
4. Avoid New Debt
Avoid unnecessary borrowing post-bankruptcy. If you must, ensure you can handle the repayments.
5. Options for Rebuilding
Rebuilding credit post-bankruptcy requires caution. Some great options for rebuilding credit are:
- Secured Credit Cards: These require a deposit, which sets your credit limit. They’re a way to rebuild credit since they often report to all major credit bureaus.
- Credit-builder Loans: These loans are offered by some institutions to help establish a good repayment history.
- Report Rent and Bills: Consider services that let you report regular payments like rent to credit bureaus, which assists in building a positive history without traditional credit products.
Looking Beyond Bankruptcy
While bankruptcy undoubtedly impacts your credit score, it’s merely a phase in your financial trajectory. By making informed decisions, exhibiting patience, and seeking guidance from experts, you can navigate toward a stronger financial future.
Author – Sonia Hickey writes on legal and consumer law matters and has previously contributed to LawFuel. This article is based on interviews with bankruptcy law firm specialists Wonais Law, Chicago.