Bankruptcy is a legal action you could use to restructure or do away with your debt, based on your financial circumstances. Bankruptcy could be beneficial if you are swamped with your financial liabilities, although it could potentially harm your credit.
Declaring bankruptcy affects your ability to handle your debts and is likely to influence how potential lenders view you as a future debtor. This blog discusses some things you ought to know about how filing for bankruptcy can affect your credit.
Bankruptcy and Your Credit Score
Many individuals regard bankruptcy as the last step in a vicious cycle that results in a judicial decree that eliminates (i.e., discharges) debt. As horrible as bankruptcy sounds, it does not leave a permanent stain on the borrower's finances, but rebuilding your financial reputation takes time and effort.
Bankruptcy is often viewed as a compromise. It erases or eliminates debts that you are unable to settle, but it also informs other lenders that you're not good at managing debt. This affects your credit scores, which can plummet and make borrowing and spending difficult. It may be extremely challenging to obtain credit cards, personal loans from a financial institution, or even a mortgage, for a small period of time after the bankruptcy is completed, and it may take several years for the effects of bankruptcy to fade.
However, many people who are thinking about declaring bankruptcy often have poor credit. In most circumstances, declaring bankruptcy, in the long term, can help your credit score. This occurs because filing for bankruptcy could remove negative information from your history.
Before declaring bankruptcy, you need to be aware of certain repercussions. The impact of the bankruptcy can last between seven and ten years based on the bankruptcy type you filed. Any prospective lender will be aware that you filed for bankruptcy until the three major credit rating agencies in the country delete the bankruptcy record from the credit report. However, there are steps you could take to start rebuilding your creditworthiness.
The crucial thing people need to understand is that even though the bankruptcy might remain on a credit report for seven to ten years, the process of being approved for credit will get better for you as each month passes. Credit scores are fluid situation, meaning even though they fall, they can go back up as well. That being said, most people can apply for credit cards soon after receiving a discharge from bankruptcy. In a lot of cases, getting a car loan is still possible after declaring bankruptcy (even though it could be at high-interest rates) and can happen right away once the case is closed. Regarding a home purchase, most FHA lenders require a two year waiting period from the Discharge until they qualify you for a home loan.
If you're unsure about what steps to take, a bankruptcy attorney could help you in establishing the best course of action for your situation. If you stick to a strict spending schedule, make on-time payments on all of your bills, and utilize a secured card, then the rating bureaus could raise your creditworthiness to a respectable level in less than 2 years.
These credit bureaus use a numerical scale to determine creditworthiness. Your chances of obtaining credit and receiving better terms increase as your score rises. Your financial activity is regularly reported by creditors as well as credit card providers to the agencies, who then calculate your score based on algorithms.
Your score can be lowered by a variety of factors, including late payments on bills, excessive use of your credit line, defaulted loans, loans that are placed in collections, and, worse yet, bankruptcy. Your score will be significantly lower after bankruptcy, and the higher the credit score was before filing, the further it will decline after the bankruptcy petition is filed. However, on the flip side, you will also be able to quickly and drastically begin raising that credit score immediately after your discharge is entered.
How you organize your finances and credit greatly influences how low your score drops and how soon it recovers. Even while the bankruptcy will remain negative on the credit record until it is expunged, if you take the appropriate steps, you can start to see a difference very quickly.
Evaluating the Impact of Bankruptcy
If you're aware of your credit score and declare bankruptcy, expect it to plummet. During bankruptcy, an individual with a 680 average score can lose approximately 130 to 150 credits. A person with an average of 780 the average can lose approximately 200 to 240 credits. Ultimately, both individuals would be labeled as high-risk borrowers, rendering it difficult to obtain unsecured credit or loans.
If your credit score falls between 500 to 400 before you file, the bankruptcy declaration could help your score. Individuals in this credit level have observed credit score increases of up to fifty points after declaring bankruptcy.
People often file for bankruptcy under one of two sections of the bankruptcy law. Chapter 13 halts collection operations and provides a repayment schedule for debtors to pay back creditors in installments over a set period. Because Chapter 7 has no repayment schedule and removes most unsecured obligations, creditors cannot retrieve the amounts they have given.
One drawback of declaring chapter 7 bankruptcy would be that it could drop your credit score more. However, it can also allow you to start the rebuilding process quicker too. Since it entails partial repayments, the Chapter 13 file stays on your file for 7 years. The effect of bankruptcy on your rating will also differ depending on the amount of debt dismissed as well as the proportion of good to bad scores on the credit file. This happens because important credit score variables like overdue payments as well as credit card usage will be adjusted.
Can You Rebuild Creditworthiness?
Even though you have no control over how long a bankruptcy stays in your history, you could take measures to accelerate the pace at which the score improves. Firstly, do not fall for a credit restoration company's proposal to fix your credit score at a cost. The only approach to start repairing credit is by becoming a beacon of financial discipline.
Below are some measures to assist you in rebuilding:
Obtain an Account For Your Secured Credit
You can get a secured card from a credit card provider provided you deposit enough money to match the credit limits. When you deposit sufficient funds to meet the limit, you can obtain a secured card from your credit card issuer. You must pay $1,500 as a down payment to the credit card companies if you would like a credit card that has a $1,500 spending cap. Although initially, this could seem unusual, it gives the ease of using plastic, and when you settle your bills on time, your score will rise quickly.
Track Your Score Every Month
Your credit score will steadily increase if you utilize credit wisely and make on-time payments. You should ultimately apply for an unsecured card when you can.
Don't Take Things Too Far
Early on after bankruptcy, all you require is a single secured card. Fixing your score will start with only using a secured card plus settling the monthly bill in full. If you've had difficulties with money management previously, using a card responsibly will assist you in rebuilding your score and perhaps even develop healthier spending patterns.
Develop A Spending Strategy Once Your Score Starts To Rise
Pick a credit card with no yearly fees if you are eligible instead of choosing a card with one. Establish a spending plan and commit to it to prevent further debt accumulation that you won't be capable of paying off each month. When an emergency causes you to exceed your budget and accumulate card debts, settle off quickly when the emergency has passed. Strive to accumulate emergency money so that you won't ever need to have credit card bills.
Pay Off Any Student Loans You Have Any
Although student loans are typically not dischargeable through bankruptcy, settling them promptly shows the rating agencies that you are handling your debt responsibly, which will boost your score.
If You Need Financing and You Have the Resources To Pay Back the Loans, Take Into Account a Credit-Builder Loan
These loans are most frequently provided at reasonable interest rates by credit unions and local banks. If you take out a $1,000 loan and repay it on time, it will appear on your credit history and raise your credit score.
Make Premium Purchases
After filing for bankruptcy, you could try to purchase a house or a car, only to find that nobody will give you a loan for the purchases. Even when you can borrow money, the interest rate will probably be very high. You should not accept loans that will be problematic to pay back. Avoid dishonest vendors when you are purchasing a vehicle.
To minimize your loan's interest rates, think about getting a close friend or family member to co-sign. Getting a co-signer who will be ready to help could be challenging because there is a risk involved for your co-signer. When you’ve found a guarantor for your credit card or loan, ensure the card or loan issuer notifies repayments to credit reporting agencies. Your credit score will increase if you make timely payments.
The quickest path to being eligible for a large loan at the current interest rates, while it could take several years, is by using a financial recovery schedule.
Frequently Asked Questions
Below are some frequently asked questions on bankruptcy and credit.
Will Filing For Bankruptcy Damage My Good Credit?
A bankruptcy filing will undoubtedly harm your credit ratings if you currently have good ones. Those with outstanding credit should anticipate a significant fall in their ratings right away after bankruptcy.
What If My Credit Score is Low?
If the credit ratings are low when you declare bankruptcy, the impact of bankruptcy will be less severe.
Will You Still Be Able To Obtain Credit Or Loans After Declaring Bankruptcy?
Depending on the type of credit you want, you could be able to obtain loans or credit right away after declaring bankruptcy.
After filing for bankruptcy, a lot of people get swamped with offers for credit cards. Credit card issuers might be keen on your business because they are aware that you can't declare bankruptcy for several years (and that you cannot discharge the credit card debts you accrue during that period). Be cautious though, as the credit card deals almost certainly come with high interests, annual charges, as well as other costly fees.
You'll probably be able to apply for an automobile loan immediately. Dealing with financial institutions, however, will result in high-interest rates as well as other unfriendly loan conditions. There are car loan options available for individuals who have previously been denied because of bankruptcy. You could check your eligibility for an auto loan after declaring bankruptcy.
The length of time it takes to become eligible for a mortgage largely depends on your mortgage provider. You may be eligible for an FHA mortgage before you even finish a Chapter 13 repayment plan as well as two years following your Chapter 7 bankruptcy.
These are the bare minimum waiting times; mortgage approval could take longer. Your salary, your debt burden, the size of your down payment, and more are additional criteria that can affect your eligibility.
Can I Restore My Score After Declaring Bankruptcy?
Even though bankruptcy can stay on your credit history for as long as 10 years, as a borrower, you could begin restoring your credit immediately. When credit scoring bureaus compute your average scores, they consider several factors:
- Your repayment history, specifically if you pay bills late or you have declared bankruptcy
- Any outstanding debts
- Your credit history's duration
- What amount of new loans have you requested?
- Debt to income ratio
- Debt utilization ratio
Making each one of your repayments on time will help you rebuild your score after bankruptcy. Reduce your debt, particularly when compared to the credit you have access to. And once you are prepared, obtain a credit card, start making reasonable purchases, and settle the balance in full each month.
Find a Knowledgeable Sacramento Bankruptcy Attorney Near Me
When seeking debt relief, it's only natural to focus largely on what bankruptcy can do for you at that time. However, because bankruptcy may have an impact on your credit score as well as your overall financial status, you must take your time to explore our options and take into account both the immediate and long-term repercussions of all debt settlement options you have.
You can seek legal counsel for advice on whether bankruptcy is the best course of action for you. Our lawyers at Modesto Bankruptcy Attorneys will walk you through the bankruptcy procedure and guide you on the next steps. Call us today at 209-314-3010.