How Filing for Bankruptcy Affects Your Credit Score
Introduction
If you are considering filing for bankruptcy, then you may be wondering how it will affect your credit score. After all, your credit score is an important metric that lenders use to assess your creditworthiness. In this article, we will explore how filing for bankruptcy affects your credit score and what you can do to rebuild your credit afterwards.
What is Bankruptcy?
Bankruptcy is a legal process that allows individuals or businesses to eliminate or repay their debts under the protection of the bankruptcy court. There are two main types of bankruptcy that individuals can file for: Chapter 7 and Chapter 13.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as "liquidation" bankruptcy, involves the sale of your non-exempt assets to repay your debts. This type of bankruptcy is typically for people who have no assets or very few assets that are exempt from being sold. Once your debts have been repaid or discharged, your bankruptcy case will be closed.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, also known as "reorganization" bankruptcy, involves creating a repayment plan to pay off your debts over a three to five year period. You will be allowed to keep your assets, but you will need to make regular payments to a bankruptcy trustee who will distribute the payments to your creditors.
How Does Bankruptcy Affect Your Credit Score?
Filing for bankruptcy will have a negative impact on your credit score, which is a three-digit number ranging from 300 to 850 that reflects your creditworthiness. The exact impact on your credit score will depend on several factors, including your current credit score and the type of bankruptcy you file for.
Chapter 7 Bankruptcy and Your Credit Score
If you file for Chapter 7 bankruptcy, then it will remain on your credit report for 10 years from the date of filing. During this time, it will be difficult for you to obtain new credit or loans. Your credit score will drop immediately after filing for bankruptcy and may continue to drop over time if you do not take steps to rebuild your credit.
Chapter 13 Bankruptcy and Your Credit Score
If you file for Chapter 13 bankruptcy, then it will remain on your credit report for seven years from the date of filing. Since you will be making regular payments to a bankruptcy trustee as part of the repayment plan, your credit score may not drop as much as it would with Chapter 7 bankruptcy. However, you may still have difficulty obtaining new credit or loans while the bankruptcy is on your credit report.
How to Rebuild Your Credit After Bankruptcy?
While filing for bankruptcy can have a negative impact on your credit score, there are steps you can take to rebuild your credit over time. Here are a few tips:
- Pay your bills on time - Late payments can have a negative impact on your credit score, so it is important to make all of your payments on time
- Limit new credit applications - Applying for new credit or loans can also have a negative impact on your credit score, so only apply for credit when you really need it
- Get a secured credit card - A secured credit card is a great way to rebuild your credit. With a secured credit card, you need to make a deposit to establish a line of credit. Use the card to make small purchases and pay them off in full each month to show that you are responsible with credit
- Monitor your credit report - Keep an eye on your credit report to make sure that all of the information is accurate. If you notice any errors, dispute them with the credit bureau
Conclusion
Filing for bankruptcy can have a negative impact on your credit score, but it is not the end of the world. With time and effort, you can rebuild your credit and improve your financial situation. Remember to pay your bills on time, limit new credit applications, get a secured credit card, and monitor your credit report. With these steps, you can get your credit back on track and achieve your financial goals.