What Does Bankruptcy Do to Your Credit?
Bankruptcy has been stigmatized over the years, yet many people don't really understand how declaring bankruptcy affects your credit. Bankruptcy can both positively and negatively impact your credit. Depending on how you handle your bankruptcy, you may end up with a better credit score quite quickly after filing.
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Drawbacks
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The biggest drawback to declaring bankruptcy is that it remains on your credit report for 10 years. When lenders see bankruptcy on your report, they will be hesitant to lend you money because bankruptcy indicates that you couldn't repay your debts in the past. In a traditional Chapter 7 bankruptcy, your qualifying debts are cleared and your assets are liquidated, whereas Chapter 13 is a repayment plan created for those with a stable income. Although lenders may differentiate between the two types of bankruptcies, either will make it difficult to obtain new credit down the road. A bankruptcy on your credit report may also make it difficult to rent a home and even to land a new job.
Benefits
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Despite the drawbacks of declaring bankruptcy, doing so may actually help to improve your credit. Most individuals who file for bankruptcy already have low credit scores as a result of high levels of revolving debt, late payments or accounts that are in collection. Upon being granted bankruptcy, those accounts are wiped clean and marked as being included in the bankruptcy. According to Smart Money writer Aleksandra Todorova, the initial increase in credit score, if any, may be minimal. However, in the long term, your score may also see a boost because Fair Isaac Corp. (FICO) grades your creditworthiness in comparison to others who have declared bankruptcy, rather than those who have excellent credit.
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Bouncing Back
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One of the most important things you can do to rebuild your credit after filing for bankruptcy is to keep an eye on the accounts that have been paid off. Make sure that they show no balance and that they are not being reported as delinquent. The next step is to apply for new credit cards -- secured credit cards are an excellent way to rebuild credit without building debt. Or, you may piggyback on a family member's card to create an account history for yourself. By carefully rebuilding your credit and avoiding any debts that you can't pay off quickly, you'll develop a healthy credit score again.
Considerations
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You must work with a government-approved credit counselor 180 days prior to filing for bankruptcy. The counselor will give you alternatives to bankruptcy, such as debt consolidation and debt management plans. If you can avoid filing for bankruptcy, you will only have to rebuild your current credit, rather than starting over from scratch, and creditors may be more lenient about lending to you in the future. The U.S. Department of Justice Trustee Program website contains a state-by-state listing of government-approved credit counseling organizations.
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