Filing for personal bankruptcy is often the culmination of years of financial struggle. Most people have already turned to a number of possible solutions to settle their debt problems without success. Bankruptcy is typically a last-resort decision, in which you legally petition a court to remove your existing debts. When the filing takes effect, you will then gain some breathing room — and the chance to rebuild your financial situation. However, because of the gravity of this step, realize that your credit will take a serious hit. It’s important to understand the truth about bankruptcy and its long-term effect on your credit. Here’s what you need to know before you take the plunge.
Immediate Effects to Score
When you file for bankruptcy, you can expect to see your credit score take a tumble — but the exact amount may depend on the score you currently hold. Generally, the lower your score is at the time of filing, the fewer points you stand to lose. Most of the time, a bankruptcy filer has already racked up a few adverse events on their credit report — such as a past-due item or collection activity — which means that a bankruptcy may not leave as substantial an impact. However, if your credit record is spotless and you boast a fairly solid score — such as between 600 and 700 — you may lose more than 200 points. Also, the total amount of debts discharged will play a part in the overall credit score slide. Someone who carried a significant amount of debt will likely experience a more substantial drop than someone who only had a couple of accounts involved.
Chapter 7 vs Chapter 13
The type of bankruptcy that you file won’t matter to your credit score. That means that the effect on your score will be the same, whether you file for Chapter 13 bankruptcy, in which you agree to repay a portion of your debts over an extended time period, or Chapter 7 bankruptcy, which simply obliterates the debts without any obligation of repayment. However, keep in mind that when potential lenders review your credit report in the future, they might view a Chapter 13 filing a bit more favorably than its counterpart.
Length of Time on Report
Bankruptcy will appear as a public record on your credit report. As long as it remains there, it will continue to affect your credit negatively. If you filed for Chapter 7 bankruptcy, the bankruptcy will be included on your report for 10 years after the date of filing. Chapter 13 filers will see all mentions of bankruptcy disappear after seven years. Any accounts that were included in the bankruptcy will be reported alongside a “discharged” or “included in bankruptcy” notation. The upside? Those accounts will no longer be reported as past due or unpaid.
Each year that passes will lessen the negative impact of bankruptcy on your credit. Once the seven or 10 years expires, you can finally breathe a sigh of relief — the bankruptcy will automatically disappear from your report. Remember that you do not need to wait for the bankruptcy filing to fall off your credit report before you can begin to rebuild your credit. To speed up the credit-building process, make sure to practice sound financial management.
Repairing Credit After Bankruptcy
Rebuilding your credit after bankruptcy can seem like an overwhelming process. But the truth about bankruptcy is that plenty of people have gone on to achieve impressive credit scores, even after nearing the brink of financial ruin. The safest way to do this is through a secured credit card, which will require you to pay an upfront security deposit that will serve as your “credit limit.” Once you build a history of monthly on-time payments, you can begin to reverse some of the negative effects of bankruptcy. Loans are also available to post-bankruptcy filers and typically require either a deposit or collateral. Keep your total debt load low — ideally try not to let the amount of debt you’re using exceed 30 percent of your total available credit.
This Is Where We Shine
The truth about bankruptcy is that you will recover. Whether you’re considering filing, or just emerging from the process, contact us for a free consultation. Our team of credit gurus at Ovation Credit have helped hundreds of thousands of consumers repair their credit. We could be just the helping hand you need today.