Many people find themselves in an unexpected set of financial problems. Creditors start calling night and day and notices begin to come in from collection agencies. Many people begin to contemplate bankruptcy a feasible option to ease the pressure of these issues. Taking that step, on the other hand, can have a lasting effect on your credit score. The best thing to do is to consult with an attorney experienced with bankruptcy to see what rights you have before you ever go ahead with filing.
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Your credit score will undoubtedly drop after you have filed for bankruptcy. Any debts discharged through filing will not automatically vanish from your credit report, and will continue to negatively affect your score until you take the required steps to repair your damaged credit. There are two kinds of bankruptcy for which you can file, and each will a different effect on your credit score.
Types of Bankruptcy
A Chapter 13 bankruptcy does not mean that your debts are gone. Instead, this is a restructuring of your debt. What will happen in the bankruptcy proceedings is that you and your creditors will work out a plan to get the money reimbursed on a time table that will actually work. This type of bankruptcy succeeds for people that are having a short-term financial crisis, such as a job loss or an illness. Although this type of bankruptcy will stay on your credit report for seven years, it does show to future creditors that you are planning to pay for your debts. If you are able to get your debt paid off after you have filed for a Chapter 13 bankruptcy, then you will be qualified for new credit after about a year.
Filing for Chapter 7 bankruptcy is much more serious, and has the most impact on your credit report. Except for child support, alimony, or unpaid income taxes, your other debts are forgiven. However, securing new credit cards or loans is highly doubtful for at least two years, and the bankruptcy filing will appear on your credit report for 10 years. You may still obtain a federal student loan after filing for Chapter 7 bankruptcy, as discriminating against those who have filed for Chapter 7 bankruptcy and then have applied for this type of loan is against the law.
Repair Your Credit Score After Bankruptcy
It is very likely that you may have some trouble getting new credit after you have gone through a bankruptcy. It will be at least two years after the bankruptcy before you are able to qualify for a mortgage. After a Chapter 13 bankruptcy, you might be able to qualify for a mortgage after the first year, but there are no guarantees. As far as credit cards are affected, it will be very difficult to get one initially.
After filing for bankruptcy, you will need to convince lenders that you have reformed your ways and that your financial situation is under control. It is tremendously important to pay all your bills on time, since even a single late payment on your credit report will appear to lenders as if you are still going through financial difficulty. Anticipate paying a higher interest rate on most loan types after a bankruptcy. However, once you work to repair your credit, you can try to refinance these loans at more moderate rates.
Since lenders focus primarily on the last 12 to 24 months of your credit history, you can re-establish your credit fairly quickly following bankruptcy. With patience and willingness to meet lenders' demands, you can re-establish your credit and obtain a better credit score.
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