How Bankruptcy Helps Your Credit
Bankruptcy is usually a last resort because of how badly it hurts your credit rating. Bankruptcy stays on your credit bureau reports for a full 10 years, and this court action does impact your credit score, but the damage is not always as bad as you might believe. In fact, a bankruptcy filing can actually help your credit in some cases.
Other People Are Reading
-
Debt Reduction/Elimination
-
Bankruptcy either cuts down your debt and packages it into a court-ordered repayment plan or eliminates it entirely. Most people will declare Chapter 7 bankruptcy, which results in liquidation of your assets and release from your debts, or Chapter 13, which lets you keep most possessions but requires some repayment. Your credit records take a blow with either type of bankruptcy, but you get a clean start in terms of debt loan. You can rebuild your damaged credit if you manage your finances carefully going forward.
Education
-
Federal law forces you to undergo financial counseling before initiating a bankruptcy and prior to its completion. Pre-bankruptcy counseling involves exploring your financial options. Then you must take a debt management course if you proceed with your case. The court action is not finalized until you complete the class, which teaches basic skills like budgeting and managing money and bills. This training prepares you to rebuild positive post-bankruptcy credit. The courts require you to use government-approved counseling firms, and charges are waived if you are unable to pay.
-
Credit Score Calculation
-
Most bankruptcy filers have badly damaged credit scores by the time they file in court. According to the "Wall Street Journal" Smart Money website, the FICO credit score company compares your records to other bankrupt consumers as part of its score calculations. This scores you more fairly than a comparison to people with good or excellent credit. Your score steadily rises as you get new accounts, use them modestly and pay the bills promptly.
New Accounts
-
Credit after bankruptcy is not as difficult to get as you might think. Many people get secured cards because of the guaranteed acceptance if they put up collateral, but some traditional card issuers actively pursue post-bankruptcy consumers. According to the Fox Business website, banks will buy customer names from the credit bureaus to send marketing offers based on specific criteria. You likely will get prescreened offers for cards to help you reestablish credit unless you opted out previously via OptOutPrescreen.com. You can always opt back in, even if you previously stopped offers.
-
References
- Federal Trade Commission: Knee Deep in Debt
- "The Wall Street Journal" Smart Money: Declaring Bankruptcy Can Improve Your Credit Score
- Federal Trade Commission: Before You File for Personal Bankruptcy
- Fox Business: What Exactly Is a "Pre-Screened" Credit Card Offer?
- Federal Trade Commission: Prescreened Offers of Credit and Insurance
