What Will Filing Chapter 7 Do to My Credit Score?
When your debt load has become unmanageable and you find that your debts exceed your assets, you might choose to declare personal bankruptcy. Under Chapter 7 bankruptcy, also known as liquidation bankruptcy, the debtor is allowed to keep some property and receives protection from creditors, but may also be required to surrender some assets. In addition, the other large downside to filing for Chapter 7 is the damage it does to your credit rating.
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Short-Term Damage
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In the period immediately after filing for bankruptcy, your credit score will be annihilated. Under Chapter 7 bankruptcy, nearly all of your debts are discharged. To a credit reporting agency, this is equivalent to defaulting on all of these debts. This fact, plus the fact that you will likely be short on liquid assets, makes you a huge credit risk. The exact drop in score will depend on the rest of your credit history, but you will certainly no longer qualify for good interest rates.
Long-Term Damage
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According to U.S. law, a credit reporting agency can keep a notation of your Chapter 7 bankruptcy on your credit report -- the compilation of information that determines your credit score -- for no longer than 10 years. However, the longer ago you declared bankruptcy, the less effect it will have on your credit score. If you begin to establish good credit shortly after your bankruptcy, you may be able to rebuild your score to decent levels within a couple years.
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Considerations
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Although declaring bankruptcy will surely drastically lower your credit score, your score may already be very poor anyways. Many debtors who declare bankruptcy are already delinquent on a number of debts. While your score will definitely drop immediately after declaring bankruptcy, it may not have very far to fall. Declaring bankruptcy, which will cause these debts to be discharged, may provide you a chance to start over again and build a new credit history.
Solutions
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After declaring bankruptcy, the best way to moderate the damage is to begin to borrow money again and pay it back on time. While getting a loan at a reasonable rate of interest may be difficult for a while, you can start by attempting to get a secured loan. For example, many banks offer secured credit cards, in which the amount of money you draw against the card's line of credit is secured by money in your checking or savings account, which acts as collateral on the debt.
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