Bankruptcy and Your Credit Report
Making the decision to file for bankruptcy to manage debt is never an easy thing to do. Even when bankruptcy is the best choice for a debtor, it’s usually a last-resort option. And while bankruptcy can provide a huge sense of financial relief and provide someone with the ability to discharge their debts, bankruptcy also has some consequences. One of the most significant consequences of bankruptcy is that it will negatively impact a debtor’s credit report. Here’s an overview of what you should know about bankruptcy and your credit report before you file for bankruptcy.
Bankruptcy Basics: An Overview
Before diving into how bankruptcy may impact your credit report, it’s important to understand the purpose of a bankruptcy filing and the types of bankruptcy. The two most common types of bankruptcy for individuals are a Chapter 7 bankruptcy and a Chapter 13 bankruptcy.
- Chapter 7 bankruptcy, or liquidation bankruptcy, is designed for debtors who have no source of income and therefore cannot repay any or a significant portion of their debts. Through this bankruptcy type, nonexempt assets will be liquidated, and remaining debts will be discharged.
- Chapter 13 bankruptcy, or a wage-earner’s plan, is for debtors who have some source of income and therefore are able to enter into a repayment plan that lasts for 3-5 years. Those who file for Chapter 13 bankruptcy will usually be able to keep more assets than those who file for a Chapter 7 bankruptcy.
How Can Filing for Bankruptcy Impact a Credit Report?
While filing for bankruptcy can provide much-needed financial relief and how a person starts over financially, bankruptcy will impact your credit score.
While most people who file for bankruptcy already don’t have a very high credit score, filing for bankruptcy will ding your score even more, causing it to drop by 100 or more points. In fact, the higher your score is at the time of your filing, the more points that it will drop by when you file for bankruptcy.
Another thing to think about is that not only will your score immediately be impacted by your bankruptcy filing, but also that the bankruptcy filing will remain on your credit report for years to come. Under federal law, a Chapter 7 bankruptcy will remain on your credit for 10 years, and a Chapter 13 bankruptcy will stay on your credit report for seven years.
How Will Bad Credit Impact Me?
If you’re familiar with bad credit, you may not be too concerned about your credit score dropping even lower after a bankruptcy filing. While the benefits of filing for bankruptcy may certainly outweigh the drawbacks, it’s important to know that a bad credit rating can make it more difficult to re-establish yourself and grow financially. A low credit score will likely impact you in the following ways:
- Make it difficult or impossible for you to open new lines of credit/get a new credit card, or secure a loan or mortgage
- Result in higher interest rates if you are able to secure a loan/line of credit
- Potentially cause your insurance premiums to rise through credit-based insurance scoring
- Make it more difficult for you to rent an apartment
- Potentially prevent you from securing certain jobs—for some careers, an employer may pull a credit report to inform a hiring decision
Building Credit After a Bankruptcy Filing
While taking a hit to your credit score isn’t ideal, the good news is that you can start building credit after a bankruptcy filing. With a strong financial strategy in place, you can overcome the consequences of bankruptcy and begin building wealth again. Here are some tips for rebuilding your credit after a bankruptcy filing:
- Know your credit score. The first thing to do is to familiarize yourself with your credit score and your credit report. If you notice an error in your report, consider meeting with an attorney regarding your options for resolving the error.
- Make all payments on time. If you do have any open lines of credit or loans, make sure you always make all of your payments on time and in full. Making on-time payments is one of the best ways to rebuild your credit.
- Consider a secured credit card. While it’s hard to get approved for a credit card after filing for bankruptcy, your bank may approve a secured credit card. A secured credit card is a credit card that requires a security deposit in order to open.
- Keep your credit utilization rate low. If you’re recovering from a bankruptcy filing, keeping your debt in check is crucial, so you should be careful about putting too much on your credit card. By keeping your credit utilization rate low, you’ll also help your credit score.
Learn More About Bankruptcy Today
If you have questions about filing for bankruptcy or life after bankruptcy, reach out to Gulf Coast Bankruptcy Attorney through our online contact form and we can help you schedule a consultation with an experienced Mississippi Bankruptcy Attorney. We are here to help you.