Are you considering filing for bankruptcy and, if so, are you under the impression that your credit rating will be ruined forever? Filing for bankruptcy is never a pleasant experience but it’s not the end of the world.
You may wonder what happens to your credit score after filing for bankruptcy. That depends on its condition before bankruptcy. If it was already low due to delinquent credit accounts, filing bankruptcy won’t make that much difference. If your score was a healthy number like, say, 700, then you can expect it to nosedive. It’s a big deal but it’s not the apocalypse.
The Fair Credit Reporting Act ensures that bankruptcy will remain on your credit reports for 10 years. During those 10 years, you may find it difficult to open any sort of credit account because creditors can be wary of your ability to keep accounts in good standing. That’s not always the case, though.
Credit card applications may start to appear in your mailbox immediately after you’re discharged from bankruptcy court. Unless you have learned nothing from the trying experience, you should toss the first wave of credit offers. Concentrate instead on promptly paying whatever bills you still have. If you have a mortgage, it is very important at this point to consistently pay your note on time. Doing so will slowly begin to raise your credit rating and you will begin to see a light at the end of the tunnel.
Those first offers of credit are potential minefields on your road to financial recovery. The offers will likely come with obscenely high interest rates and other fees because of your bankruptcy. The smarter way to go is to apply for a secured credit card and pay off the balance each month. If you can’t pay it off monthly, at least pay more than the minimum required. Just pay it on time, every time.
The first two years after bankruptcy are very important. Future creditors will probably look back to check how you handled your finances in those two years to determine whether you are a risk they are willing to take. Make a budget and stick to it. If you must go off-budget from time to time, try to pick up some extra work so you’ll have the income to cover any budget shortfalls.
Bankrupt consumers who display responsible use of credit can actually see offers for new credit at market terms after two years. During this period and beyond, it’s important to keep an eye on your credit reports. You want to make sure that everything is properly labeled and the bankruptcy judge’s rulings are being upheld. Check your scores regularly is a good habit to acquire, even if you haven’t filed bankruptcy.
You should know, too, that bankruptcy filings and rulings are public records that the court, creditors and records-compiling companies can look up. Let’s say that after your bankruptcy, you apply for a new job. It is legal for potential employers to look into your credit history and they can deny you the position based on what they find there.
That would be humiliating, for sure, but it’s no worse than standing before a bankruptcy judge or trustees and explaining in court how you got yourself into such a mess. No stone is unturned at this hearing and all of the spending habits that got you in trouble sound a lot worse when you vocalize them in front of strangers.
The condition of your credit report after bankruptcy will also depend on whether you filed Chapter 7 or Chapter 13. Chapter 7, or liquidation, is when most of your debt is erased and you have a virtual clean slate from which to start over. Chapter 13, or reorganization, will leave some of your debt in place and you have to present to the judge a plan to pay it back.
Either way, you can expect your credit rating to suffer. How much it suffers and how quickly you recover from it depends on how you take care of your financial obligations.
For more information on how your credit will be affected by bankruptcy or to find out more about which type you should file for, visit the Federal Trade Commission’s website.