People often turn to bankruptcy to get relief from their debt. After exploring all of their options, bankruptcy may seem like the best choice because there is potential to get at least a portion, if not all, of their debt, eliminated.
Declaring bankruptcy may help with your debt, but you’ll want to ensure you understand the consequences, especially when it comes to your credit.
What is bankruptcy?
Bankruptcy is a legal process that consumers undergo when they wish to eliminate or reduce their debt. When declaring bankruptcy, consumers have to first decide which of the two options is best for their circumstances.
- Chapter 7: Consumers can have their debt discharged following the liquidation or sale of their assets, such as their home or vehicle. The proceeds of the sale will be used to repay creditors, but no additional payments need to be made if the sale of the assets does not cover the total amount of the debt.
- Chapter 13: Consumers are responsible for repaying a portion or all of their debts depending on the repayment plan that has been negotiated with their creditors. Once the payment period lapses, the remaining debt will be discharged.
How does bankruptcy affect your credit?
Bankruptcy may allow consumers to eliminate or reduce their debt, but affect them in many ways. Losing their assets can be difficult, but the impact bankruptcy has on their credit score can be just as hard to deal with.
Your FICO credit score ranges from 300 to 850. People should aim to have a high credit score, but any derogatory information that appears on your credit report is what will bring it down. Although there is no set number of points that a person’s score will drop if they declare bankruptcy, people should expect to see a change.
In addition, seeing a decrease in score once this derogatory information is listed on your credit report, you will probably find that lenders won’t approve you for credit or you’ll have high-interest rates on your accounts if you are approved, and this is because your low score makes you more of a risk.
Can your credit be repaired following a bankruptcy?
Bankruptcy will stay on a person’s credit report for 7 to 10 years. This can be a concern for some consumers because they fear that their credit will forever be ruined; however, declaring bankruptcy doesn’t mean their credit cannot be repaired.
If you have filed for bankruptcy, there are things you can do to improve your score over time:
- Make on-time payments: Making on-time payments has a positive impact on your credit score. It shows that you can manage your debt and have paid on your accounts as agreed. With continued on-time payments, you can see points added to your score.
- Keep credit utilization low: Your credit utilization measures how much of your credit you have used and how much debt you owe. It is recommended that people keep their credit utilization low because high credit utilization does not make you look good to lenders, and it can decrease your score.
- Avoid applying for credit: When people apply for credit, it results in a hard inquiry on their credit report. Each hard inquiry has the potential to lower your score, but multiple hard inquiries can do a lot of damage, especially when you apply for credit frequently.
- Dispute inaccurate information: Inaccurate information on your credit report should be disputed because it can potentially be harmful to your score. For example, a creditor reported a payment as late or the balance on an account has not changed even though you have made payments. Rather than leave this inaccurate information on your report and watch your score plummet, you can get it corrected or removed and watch your score increase.
Bankruptcy can be the perfect solution when your debt has grown out of control. Although it can help, it can also be harmful. Before declaring bankruptcy, consider the many effects it can have on your life.
Need help restoring your credit following a bankruptcy or other credit problems? Contact Credit Absolute today for a free consultation!