Bankruptcy And How It Affects Credit
Bankruptcy is quite a serious thing. Not only does it put you in a new state of financial distress but it affects your credit severely. Yet, there are some good things about it, too. Depending on the type of bankruptcy you file, why you file and how much you file, you could actually find real benefiting from filing rather than not filing. For each person, the circumstances are different. The bottom line is, though, that you have to know what to do when bankruptcy happens to you.
What Bankruptcy Does
When a person files bankruptcy, specifically Chapter 7, they will be eliminated any of their debts that are included in that bankruptcy. In a Chapter 13 bankruptcy, the debts that are included are restructured, allowing the individual to pay them off over the course of time rather than all at once with high fees. In either case, the fact is that you are not fulfilling your obligation to the lender that has lent you money and therefore your level of risk is increasingly high. You don’t look like someone that has the potential of managing their credit effectively.
When your bankruptcy is discharged, the credit reporting agencies will record this on your credit report. They will include when it happened and that will stay there for the next ten years time. In addition, the accounts that were included in your bankruptcy will stay on your credit report but will be marked as being included in bankruptcy. These accounts will stay there from seven to ten years from the date of your bankruptcy discharge.
What This Means
For the lender that you are applying for new credit from, bankruptcy looks like trouble, but not as bad as you may think. During the first two years after you have filed, you will be very much paying the price for filing. That means that you will find it harder to get any type of loan, including secured loans such as homes and vehicles. You will find that when you do secure a loan, the interest rate will be very high and therefore the loan will be very costly. Another factor that plays a role is that of fees. You are likely to pay high annual fees on any lines of credit you do open.
Often, lenders will begin offering these loans and lines of credit to those that have filed bankruptcy about six months or longer after their discharge. As time passes and you continue to maintain good credit from after the point of your discharge, you will slowly see the interest rates on offers falling as well as fewer fees and just more offers in general.
Can It Be A Good Thing?
What many don’t realize is that filing bankruptcy can actually be a hidden benefit to some people on their credit reports. Consider this. If you have $12,000 in debt, are making late payments each month because you can’t make ends meet and are dealing with over the limit fees, you are a huge risk and a huge mess. No lenders will offer you anything when you can’t handle what you already have.
But, when you file bankruptcy and all of those things are gone, you don’t look nearly as bad as you would have. That’s not to say that you can just go out and find ten offers, but what you can do is work on improving your credit score since your bankruptcy.
Tips For Improving Your Credit After Bankruptcy
- Monitor your credit report as errors often happen after a bankruptcy. Make sure that debts that were discharged are represented as such on your report, not that they are lurking as unpaid debts.
- Apply for credit. Get a credit card, even if it does offer a high interest rate, and use it. Use it responsibly by paying it offer on time or paying it off completely each month. Monitor your usage. By using some credit, you are reestablishing your credit in good terms, which will drive up your credit score.
- Keep secured loans positive. Home mortgages and car loans should be kept, if possible, and be continuously paid on a timely basis. This will show that you are paying your bills back.
There is no doubt that bankruptcy will negatively reflect your credit. It is a public record which will tarnish your report for the next ten years time. Nevertheless, there is a bright spot in that it can help you to reestablish your financial future so that the outlook begins to look up. |
