What Happens to Your Credit Score After Bankruptcy
Credit is a tricky thing. It takes a long time to build it and have excellent credit. It can be challenging to maintain, and it only takes one bad decision to bring your credit tumbling down. While it takes several poor choices to impact your credit detrimentally, it is hard to recover. It is not impossible, but it does take consistent work. Bankruptcy affects your credit significantly. Check out this article to find out what happens to your credit score after bankruptcy.
Before we talk about what happens to your credit score after bankruptcy, let’s talk a little about bankruptcy itself.
What is Bankruptcy?
It is a legal process by which you or your business has stated that you cannot repay your debts. The most common way bankruptcy occurs is when you, the debtor, file a petition with the court. You are asking for your debts to be forgiven because you cannot repay them. Bankruptcy is handled by a federal court. A process takes place where all of your assets are evaluated to determine if they can be used to repay the debt. Keep in mind, if you are paying a mortgage for your house that is not considered an asset. However, if your home is paid in full, and you own it, it is an asset.
What Does Bankruptcy Do To Your Credit Score?
In the simplest terms, what happens to your credit score after bankruptcy is your credit scores plummet. This is because the accounts on your credit report are listed as discharged or included in bankruptcy. Your credit score is going to decrease by about 100 points. For the average person, that means it will go down to 500 - 550. If your lack of payment already impacted your credit, it might have already begun decreasing, which means your credit score may be in the low 400 area, which is considered a low credit score.
How Does Bankruptcy Appear on Your Credit Report
Everything you do with your credit and debts is outlined in your credit report. The same is true for bankruptcy. It is outlined on your credit report, and every potential lender sees it. Depending on the type of bankruptcy you file dictates how long it remains on your credit report. If you file Chapter 7, it stays on your credit report for as long as ten years. If you file Chapter 13, it remains there for as long as seven years.
Are All Bankruptcies the Same?
There are two different types of bankruptcy, and each one has a different impact on your credit. What happens to your credit score after bankruptcy depends on which kind of bankruptcy you file and what happens from there.
Chapter 7 is the process that allows you to sell off all of your property that holds any value. That money is used to pay off your debts. Typically, it is not enough money to pay them off completely. The court has the authority to discharge the excess debt. This has a more significant impact on your credit score because you are not making any payments. You are considered high risk.
Chapter 13 allows you to discharge some specific debts, such as medical bills. You repay the other debts, at least in part, over a three to five year period of time. This is less of a hit to your credit because you are making good faith efforts to repay the debt. However, it still impacts your credit, and creditors see you as having questionable credit worthiness.
How Do You Recover After Bankruptcy?
It is important to remember while bankruptcy can seem devastating, it is hurting your credit temporarily. You can recover and rebuild, but you must learn a lesson, too. While there could be several reasons why you had to file bankruptcy from losing a job, death in the family, business going under, there is a lesson to learn. If you had too much debt because you were spending beyond your means, you want to take a hard look at your spending and make some adjustments. You may want to consider creating a budget if you do not already have one. If you have one, either stick to it or make some major adjustments.
How Can You Rebuild Credit?
While it may seem logical to you to think that simply getting rid of the debt you cannot pay will increase your credit score, that is not the case. Bankruptcy is going to impact your credit negatively. Now is the time to begin again. You must obtain new credit and use it wisely. As you slowly begin to obtain new credit, stay well within your means. It may be challenging but find a credit card or a loan where the lender is willing to take a chance on you. You can also get a credit card that is funded by your checking account. This type of credit card bases your available credit on how much money is your checking account. Its intention is to help you rebuild your credit responsibly by not allowing you to go outside what you can afford to repay.
When you do get new credit, pay your bills on time in full. If you cannot pay your credit card in full, you are spending too much money. If this happens, pay as much as you can and make sure it is more than the minimum payment. You never want to pay below that amount. When you consistently pay bills on time and in the proper amount, your credit score will begin to improve.
Is Saving Money Really An Option?
It would be best if you made saving money a priority. Before you begin spending money, you want first to save money. This helps give you some padding when you find yourself in a position where you cannot pay your bills. In that budget we mentioned above, you want to incorporate a savings plan. You should put money in your savings account first before you do anything else. This is referred to as paying yourself first.
Want More Help?
If you believe that you need to file bankruptcy or have all your debts discharged as a result of bankruptcy, you may feel like you do not know what to do next. Have no fear because the Goalry Mall is here to help. We have a vast amount of resources available to you with guidance for your next steps. We have articles, videos, and other resources that can walk you through the steps you should take. Visit Goalry Mall today to see how we can help you.
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Conclusion
Even if you have filed for bankruptcy, there are many ways you can still help yourself and improve your credit. Do not give up. Remember, consistent, hard work will see you to the end and help improve your credit score.