Filing for bankruptcy is a common solution for individuals burdened with unmanageable amounts of debt. Many debtors worry about the effects declaring bankruptcy will have on their credit score and financial future. After all, there are a lot of myths out there. Before filing for bankruptcy, it is important to understand the consequences. The truth is that filing for bankruptcy does damage your credit score. But, the good news is that you can repair your credit score.
Below we will go over how declaring Chapter 7 and Chapter 13 bankruptcy affects your credit score and the steps you can take to rebuild your creditworthiness.
How does filing for bankruptcy affect my credit score?
If you’re considering filing for bankruptcy and have struggled with debt for an extended period of time, your credit score has probably taken a hit already. Consequently, filing for bankruptcy may not reduce your score much more. However, if your credit score is higher when you decide to file, a bankruptcy filing will have a greater impact.
Each debtor’s situation is different, and details such as the amount of debt discharged and the proportion of negative to positive accounts on your credit report are factored into your credit score. For example, if you have a relatively low amount of debt and only a few accounts included in your bankruptcy, your credit score will be less affected than someone with a more severe bankruptcy. The presence of a bankruptcy and the length of time the bankruptcy has been on your report are the strongest determining factors.
Each form of bankruptcy has a slightly different effect on your credit score. Chapter 7 bankruptcy is the simplest and quickest form of bankruptcy calling for the liquidation of a debtor’s nonexempt property. Chapter 7 bankruptcy remains on your credit report for 10 years.
With Chapter 13 bankruptcy, debtors develop a plan to repay their creditors over a specified period of time. Because Chapter 13 bankruptcy offers a little hope that the lender will receive payment, future creditors often see it as more desirable or having less impact on your credit. Chapter 13 bankruptcy is only listed on your credit report for 7 years.
How to rebuild your credit after filing for bankruptcy
While you should expect a lower credit score after bankruptcy, bankruptcy does not ruin your credit score forever. You can build your credit back up with smart credit management. Here are a few steps to take to begin rebuilding your credit:
1. Check your credit score for accuracy
Once you’ve filed for bankruptcy, your credit report should show a $0 balance for any accounts that have been discharged through bankruptcy. If any of your discharged debts are shown as active, let the credit reporting agency know that they should not report any further information on those accounts by sending each agency a copy of your discharge. You can also dispute any errors to the credit bureaus.
2. Pay non-bankruptcy accounts on time
Show creditors that your financial mistakes are behind you by paying the accounts that were not discharged by bankruptcy on time. Any accounts that are active will continue to impact your credit score. The two things that are the most helpful in repairing your credit score are time and positive payments.
3. Don’t use a credit repair company
Credit repair companies will likely reach out to you to offer to take the bankruptcy off your report. The truth is, if your bankruptcy report is accurate, there is nothing these companies can do for you that you can’t do yourself.
4. Avoid job hopping
Lenders look at more than just your credit score. They look at your job history, too. Frequent job changes may negatively impact your ability to secure new credit.
5. Secure new credit
Securing new credit is critical to rebuilding your credit score. Try applying for a credit card, gas card, or even a retail card. Then, make small purchases on the card and pay the full balance on time every month. This way, you will avoid interest and start stacking up positive marks on your credit report.
In general, practice smart financial habits. Charge what you can afford and pay the balance off every month on time. It might take a few years, but it is possible to rebuild your credit after filing for bankruptcy.
Learn more about filing for bankruptcy and repairing your credit score with Tolar & Tolar Attorneys at Law
At Tolar & Tolar Attorneys at Law, we have years of experience helping other people get themselves back on track – giving them a new and brighter economic outlook. We would appreciate the opportunity to do the same for you. Let our family help your family!
Serving the people of Millbrook, Auburn, Prattville, and Tallassee, we are your local solution to make the tough times easier. Contact us today to set up your free consultation!