Are you having trouble managing debt? If you have an overwhelming amount of debt and don’t see any way to achieve financial stability, it may be worth considering filing for bankruptcy. Declaring bankruptcy is a major decision, and you should consider all angles before doing so. How does bankruptcy affect your credit score? Here’s a closer look.
Although bankruptcy can initially lower your credit score, it may be the best way to work toward a better financial future.
Are You a Good Candidate for Bankruptcy?
Choosing the Right Option for You
Bankruptcy can create a path out of debt, but it’s not the only option you have if you’re struggling with finances. If you’re seriously considering filing for bankruptcy, you must choose between Chapter 7 and Chapter 13 bankruptcy. Here’s a quick overview of each.
Chapter 7
With Chapter 7 bankruptcy, most of your unsecured debts are discharged. You may be a good candidate for Chapter 7 bankruptcy if:
- You have a low income or no steady income.
- You have few assets.
- Most of your debt is unsecured (like credit card or medical debt).
While you can keep “exempt” assets — like your home and a vehicle up to a certain value — any extra assets you have may be seized and sold to pay creditors.
Chapter 13
Not everyone can qualify for Chapter 7 bankruptcy. If your income is too high, you may consider Chapter 13 bankruptcy. You may be a good candidate if:
- You have a steady income.
- You have assets you want to keep.
- You think you can reasonably repay most of your debt in 3-5 years.
Chapter 13 bankruptcy is sometimes called a “wage earner’s plan” because it’s designed to help those with a reliable income repay their debts.
How Bankruptcy Impacts Your Credit Score
Your credit score is meant to show lenders how likely you are to be able to repay a debt. The lower the credit score, the riskier it is for a mortgage lender, credit card company, or other financial institution to lend you money. Because declaring bankruptcy suggests serious financial problems, it will temporarily lower your credit score. The length of time a bankruptcy stays on your credit report depends on the type of bankruptcy you file:
- Chapter 7 generally remains on your credit report for 10 years.
- Chapter 13 generally remains on your report for seven years.
When you initially file for bankruptcy, your credit score can take a major hit. Credit bureau Experian notes that your credit score could drop as much as 200 points. Somewhat counterintuitively, people who had relatively high credit scores before declaring bankruptcy tend to see the largest drop. For instance, someone with a 700 credit score might see their score drop to 500 after declaring bankruptcy, but someone with a 400 credit score might only have a 50-point drop to 350.
The reasoning behind this is that if someone with good credit declares bankruptcy, it’s a significant deviation from their previous financial behavior. This is a major cause of concern for lenders, so it usually leads to a substantial drop. If someone’s credit score was already low, lenders already viewed them as unreliable, and declaring bankruptcy isn’t much of a departure.
If you’re struggling with finances and considering bankruptcy, you don’t have to make this major decision alone. Get in touch with Fesenmyer Law Office at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) for a free initial consultation.
How Long Does It Take to Rebuild Credit After Bankruptcy?
Your Credit May Bounce Back Sooner Than You Think
The steep drop in your credit score that typically happens after you declare bankruptcy can be disheartening. However, the good news is that you can start rebuilding your credit score as soon as possible. Managing credit responsibly and avoiding taking on additional debt can help your score recover faster.
The majority of our clients can take out a car loan or get a credit card right after they declare bankruptcy. While getting a home loan right after declaring bankruptcy may not be possible, we have seen many of our clients qualify for mortgages within 2-3 years.
Tips for Rebuilding Your Credit Score After Bankruptcy
It takes time for your credit score to rebound after bankruptcy, but the right steps may help speed the process along.
1. Keep Paying Non-Bankruptcy Accounts as Agreed
If you have any loans, credit cards, or other debts that aren’t included in your bankruptcy, make sure to keep paying these accounts on time and in full. This will help minimize credit damage.
2. Consider a Secured Credit Card
After bankruptcy, getting a credit card and using it responsibly can help rebuild your credit. If you don’t qualify for a traditional credit card, you might consider a secured credit card. With a secured card, you make a cash deposit into your credit card account and then use the card (much like you would with a debit card). You get your deposit back once you repay what you’ve spent and close your account. Make sure that the secured card you choose is one that reports to credit agencies so that it will help improve your credit score.
3. Stay Away from Credit Repair Companies
After you declare bankruptcy, you may encounter companies that claim to be able to “repair” your credit. Some may promise to remove your bankruptcy from your credit report. Most of these companies are scams, and many make promises they can’t legally keep.
4. Check Your Credit Report
After you declare bankruptcy, you should get a copy of your credit report and verify that the bankruptcy is accurately reflected. If there are any reporting errors, you should dispute them with the credit bureau as soon as possible.
Are You Considering Filing for Bankruptcy?
When you feel buried under a growing mountain of debt, it may seem as if there’s no way out. However, there’s a brighter financial future for you, and Fesenmyer Law Office is ready to help you find it. Our affordable bankruptcy attorney has helped thousands of Ohio citizens find their way out of debt, and we may be able to help you, too.
If you need an affordable bankruptcy attorney — or help deciding whether bankruptcy is right for you — call us at 614-228-4435 (Columbus), 937-222-7472 (Dayton), or 877-654-5297 (Cincinnati) for a free consultation.
