How Does Bankruptcy Affect My Credit?

Bankruptcy is a process in which you legally declare that you’re unable to repay your debts. Through bankruptcy, you can have all or part of your debt discharged, eliminating your responsibility to pay. There are two major types of personal bankruptcy for consumers; Chapter 7 and Chapter 13 bankruptcy. A successful Chapter 7 bankruptcy would result in a discharge of your debts. While a successful Chapter 13 bankruptcy would reorganize your debt into a three- to five-year repayment plan. While bankruptcy will give you some relief from your debt, that relief comes at a cost. Filing bankruptcy does major damage to your credit and affects your ability to borrow for the rest of your life.

How Much Will Your Credit Score Drop After Bankruptcy

Your credit score is a numeric number assigned to your credit history. It’s a kind of grade that lets lenders know quickly whether you have good or bad credit. Your score can range from 300 to 850, with higher scores being better. The precise numeric impact of bankruptcy on your credit cannot be predicted. That’s because the makers of the credit score haven’t assigned bankruptcy a number. What we do know is that bankruptcy will leave you with a low credit score. If you start out with a high credit score, bankruptcy could cause your score to drop a couple to a few hundred points. On the other hand, if you already have a low credit score, your score won’t have far to fall.

A Low Credit Score Will Hurt in the Future

So many businesses use credit scores these days, it will be hard to get around the impact of a low credit score. You’ll probably be denied for credit cards and loans, especially in the first few years after you file bankruptcy. Not only that, you could have trouble buying and even renting a home. Many landlords now check credit history as part of their application process. Employers also check credit scores before extending a job offer. A low credit score and especially a past bankruptcy could leave you unemployed.

Before You File Bankruptcy

Seek help from a consumer credit counselor. The new bankruptcy law requires you to get credit counseling from a government approved agency within 180 days of filing bankruptcy. You can call 1-202-514-4100 for help finding an approved credit counseling agency in your area. You should take advantage of the opportunity to attempt to work out a comfortable payment plan with your creditors. You may be able to repay your debts without having the negative bankruptcy mark.

Use Valuable Assets to Repay Your Debt

When you file bankruptcy, the court will review your assets to see if any of them can be sold and used to pay off your creditors. You can do this yourself, before filing bankruptcy to reduce as much of your credit card debt as possible.

Make Sure You Exhaust Alternatives

Realize that bankruptcy is an action that will follow you for the rest of your life. While bankruptcy will only be included on your credit report for a maximum of 10 years after you file, future loan applications will ask if you’ve ever filed bankruptcy. You must answer that question truthfully, or you could face charges of fraud.