Bankruptcy and Your Credit Score
If you are thinking about bankruptcy, one of your biggest concerns may be your credit score, and how bankruptcy will affect it. Of course, bankruptcy does have a negative impact on your credit, but for how long? And how bad will your credit be after your bankruptcy?
It May Not Be So Bad
Many people who file for bankruptcy already have poor credit. They may have overdue bills, a high debt to credit ratio, and perhaps even loans in default. If you happen to have stellar credit when you file for bankruptcy, you will see a significant credit drop–but realistically, for the rest of us with less than stellar credit, the drop in credit post-bankruptcy may not be that significant.
How Fast to Rebuild?
Another credit issue to consider is how fast rebuilding our credit will take. Let’s assume that you have loads of debt and you are making the minimum payments on your debts. With high interest rates, you could be paying off those debts for 10 or 20 years. That means that your credit will not have any realistic chance of improving for a very long time.
However, once you file for bankruptcy, your credit may take an initial hit, but after discharge, your credit will be on its way back up (assuming you don’t make any foolish credit decisions after you file). It is true that the bankruptcy itself will not come off of your credit for 7-10 years. However, that doesn’t mean your overall score can’t start to improve immediately after you get your discharge.
Even if it takes 3, 4, or 5 years to rebuild your credit after a bankruptcy, that is much shorter than the 10 or 20 years it would take to pay off bills making minimum payments.
Many creditors may even begin to extend credit or more favorable interest rates to you after bankruptcy, because they know that you cannot file another bankruptcy in the short term.
One common strategy to help rebuild credit is to take out a credit card or line of credit that is offered to you, and charge a very small amount–say, $50–every month, and pay it off on time. Strategies like these can help you begin to rebuild your credit right after a bankruptcy, and they are strategies that would not be available to you in many cases, if you had loads of debt, were behind on payments, and did not file for bankruptcy.
Chapter 7 vs. Chapter 13
Your credit may not drop as much if you file for Chapter 13 bankruptcy than if you file for Chapter 7, because in Chapter 13, you are paying back some of your obligations, as opposed to getting a complete discharge of all debts the way you do in a Chapter 7.
The amount that your score will drop will also depend on how much debt you end up discharging in your bankruptcy. The more debt you discharge, the greater the drop in your credit score will be.