Will Filing Bankruptcy Ruin My Credit?
When weighing the possibility of bankruptcy, the aftermath of filing is often a big concern for my clients. While bankruptcy offers the relief of debt discharge, it also carries with it uncertainties regarding the accessibility of future loans. How will bankruptcy affect my credit score? When will I qualify for a mortgage after bankruptcy? Will I be able to secure a car loan or a credit card? These are all valid concerns that my clients present to me and, to be honest, I do not always have a precise answer to give them.
The process of rebuilding credit after bankruptcy is unique to each individual, and thus offering exact timelines is often inappropriate. However, I can offer my clients some insight and hints, which I will share with you below:
Your Credit Score Will Likely Take a Hit: It is generally true that filing bankruptcy will negatively impact your credit score, and thus your ability to secure loans, for some time directly after filing. However, many of my clients that chose bankruptcy do so as a last resort. They already have such repayment problems as late payments, high balances, defaults, and collections accounts.
If your credit score has already taken a few hits, filing for bankruptcy may not have as large an effect as one would imagine. According to John Ulzheimer, president of Credit.com Educational Services, some consumers may even see a slight boost in their magic number.
Plan on a Several-Year Rebuilding Period: A bankruptcy will remain on your credit report for upwards of 10 years. That being said, many clients see an increase in their score to pre-filing levels within 2-4 years. The exact length of this period depends on numerous factors, with those like the current lending climate being completely out of your control. However, it can be accelerated with a few tricks.
Clean Up Your Credit Report: After the discharge of debts, be sure to review your credit report. You are entitled under federal law to have the balance of each discharged debt changed to $0. While the payment history will remain, you will no longer show any liabilities to these companies. If this is not the case, be sure to contact the three major credit bureaus and correct these errors.
Pay Bills Early Each Month: Organize your finances and create a budget that allows you to pay all of your bills early each month. During this time of rebuilding, you cannot afford the little dings to your credit report that often come with late payments. Another thing to keep in mind is that, while auto-payment features are convenient, they all too often lead to mix-ups like overdrafts and payment rejection. If you think this is even a remote possibility, pay your bills manually.
Don’t Give Up Credit Cold Turkey: To rebuild your credit, you need to prove to lenders that your fiscal situation has improved and you are now able to successfully manage loan accounts. Given the tight reins on credit in today’s economy, this is often easier said than done. However, it is possible. Some debts cannot be discharged and many clients will choose to reaffirm a loan or credit account and thus keep it active after filing. Pay these loans religiously each month. Another option is to consider revolving credit accounts.
Many businesses, such as retail stores and gas stations, issue credit cards. If you do not qualify for one yourself, apply as an authorized user under the account of an agreeing family member. A final option is to apply for a secured loan from your bank or credit union. Such loans exist specifically for credit rebuilding and often require you to secure the loan with an equivalent monetary sum. When you successfully pay off the loan, that money will be returned.
Recovering from bankruptcy takes some patience, but is often easier than people imagine. Starting fresh with a blank slate means you are no longer bogged down by prior debt. The most important thing to do is recognize what preceded your need to file and to change your habits so that this situation can be avoided in the future.
