Bankruptcy is a legal tool designed to help individuals and businesses who cannot pay their debts. While bankruptcy can offer a fresh start, it also has substantial consequences, particularly for your credit score.
This blog post will help you understand the facts and dispel myths surrounding bankruptcy’s impact on credit scores.
Let’s first clarify what happens when you declare bankruptcy. The moment you file for bankruptcy, it gets noted in your credit report, and it significantly impacts your credit score.
The severity of this impact depends on the type of bankruptcy—Chapter 7 or Chapter 13—and your credit score before filing. If you had a high credit score, you might see a sharper drop than someone with a low credit score.
In general, a Chapter 7 bankruptcy, where most of your debts are discharged, stays on your credit report for ten years from the date you filed.
On the other hand, a Chapter 13 bankruptcy, where you enter into a repayment plan, can remain on your credit report for seven years.
This difference is due to the fact that in Chapter 13 bankruptcy, you’re committing to pay back some or all of your debts, hence it’s viewed somewhat more favorably by creditors.
One of the most common myths about bankruptcy is that it will ruin your credit forever. While it’s true that bankruptcy can have a negative impact on your credit score, the effect is not permanent.
Yes, bankruptcy stays on your credit report for a significant period, but its impact lessens over time.
With disciplined financial behavior, you can begin to rebuild your credit score even while the bankruptcy record is still present. This includes paying all bills on time, keeping low balances on credit cards, and not applying for too much new credit at once.
Filing for bankruptcy can lead to a drop of 130 to 240 points in your FICO credit score. This can move someone with fair or good credit into the poor credit category. This drop is significant and can impact your ability to get credit or loans, and may also affect insurance rates, employment opportunities, and housing applications.
It is possible to rebuild your credit afterwards. It requires time, patience, and disciplined financial behavior.
Keep your debt levels low, pay all your bills on time, and avoid applying for too much new credit. Secured credit cards and credit-builder loans can also help you rebuild your credit by demonstrating responsible credit use.
Another common misconception is that bankruptcy erases all debt. While bankruptcy can help discharge many types of debt, certain types are typically exempt, including most student loans, child support, alimony, and certain tax obligations.
Thus, it’s important to understand that filing for bankruptcy won’t necessarily give you a clean financial slate.
It’s a myth that struggling with debt and having poor credit is better than filing for bankruptcy.
In reality, continuously missing payments or having accounts go into collections can be just as damaging, if not more, as filing for bankruptcy. Bankruptcy can offer a chance to stop the downward spiral, allowing you to reestablish good credit habits without the burden of unmanageable debt.
In conclusion, bankruptcy can affect your credit score, but it does not mean a permanent financial downfall. It is a tool to help provide relief from crippling debt and offer a chance to rebuild your financial health
At Blue Bee Bankruptcy, our lawyers are highly experienced in bankruptcy options. More importantly, we understand that each case we receive is unique and each client has different needs and goals. We will discuss these signs with you and decide the best route to take.
We strive to help our clients rebuild their lives and take steps toward a better financial future through filing.
If you’re dealing with the potential of bankruptcy, give us a call. Our team will work to help you by reviewing all of the options our firm has available. We will ensure you’ll get the best possible outcome for your situation.
Get in touch today so we can start working on either halting bankruptcies or preventing them from taking place altogether!