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Bankruptcy & Your Credit Score

If you have been struggling with overwhelming debt, you may be starting to explore what options you have to get out from underneath it. If you need quick relief from the weight of your debt, you have most likely considered filing for bankruptcy; however, it is not a decision you should make lightly. In fact, there are many things to consider before you decide to file for bankruptcy, such as the different chapters of bankruptcy and how it may affect your credit score.

Before we look at how bankruptcy can impact your credit score, it is important to understand that there are several chapters of bankruptcy you can file, so first, you will need to decide which one best suits your specific situation.

Bankruptcy Filing Options

Bankruptcy Filing Options Fort Collins, COChapter 7– This is the most commonly filed; it calls for liquidation of all non-exempt assets in exchange for clearing “discharging” unsecured debts, including credit cards, medical bills, etc. If you have a low income compared to the amount of unsecured debt without a lot of assets, Chapter 7 may be the right choice for you.

Chapter 13– This one offers a way for you to pay back your debt over several years by reducing interest rates. This option is particularly good for people who have a lot of debt but have the financial ability to pay back most of it over a prolonged period of time.

Chapter 11– If you have a small business with a lot of loan debt to pay back but are looking to maintain day-to-day operations and stay in business while paying back your debt, Chapter 11 may be right for you. Filing Chapter 11 can be tricky to file properly, so make sure you get a good bankruptcy attorney who understands the complexity of this one.

Once you have decided which bankruptcy filing works for your situation, you may be wondering what happens next as far as how it may affect your credit moving forward.

How Will Filing Bankruptcy Effect My Credit Score?

If you have been staying current with payments to your creditors up until now, you may see a significant change to your credit score. If you are considering bankruptcy, it is likely that you have fallen behind on your payments and are struggling to keep your head above water.

With the increasing interest and late fees your credit has probably already taken a substantial hit but there are other ways that bankruptcy can affect your credit.

While Chapter 7 will remain on your credit report for ten years following the filing date and Chapter 13 for seven years, you will still be able to get credit. Though, obtaining credit after bankruptcy may entail higher interest rates, annual fees, and other costs that may stay inflated until you begin to rebuild your credit.

It will take some time to rebuild your credit following a bankruptcy filing, but there are some steps you can take to help while waiting for it to drop off your credit report, such as staying current with your credit report and filing disputes where your bankruptcy may not have been reported properly.

You can also obtain a secured credit card to help rebuild. These cards require a deposit, and the lender will, in turn, give you the same amount in credit. If you don’t max it out and pay it down completely each month, this will help your credit standing. You may want to consider getting a car loan so that the payments can continue to report to the credit bureaus.

Filing for bankruptcy does not have to ruin your credit score, but it is important that you understand your options and what they entail. Having a good bankruptcy attorney who knows the ins and out of the process can drastically improve your outcome.