Personal Bankruptcy and Credit Issues
You may have heard the myth that bankruptcy "destroys" your credit for ten years. Luckily, that bit of folklore is partly a myth.
Information from a Chapter 7 bankruptcy filing stays on your record for 10 years, while a Chapter 13 will only be on your record for seven years. Unfortunately, right after you file for bankruptcy, your credit score will probably tank.
But its impact will likely last a significantly shorter time than a decade. If you really work on rebuilding your credit, you can achieve a good credit score. And the quicker you work to rebuild credit, the faster it will improve.
Credit Before Bankruptcy
In all likelihood, if you're struggling with debt and considering bankruptcy as a way out, your credit probably isn't that strong right now.
Specifically, if you engage in the following practices, you probably have a lower credit score:
- Frequently missing payments: Missing payment due dates often triggers late fees from your creditor and harms your credit score.
- Using a high percentage of your available credit: One measure of credit health is the ratio of available credit to credit being used. The closer you are to your limits on various accounts, the lower your credit score will be.
- Opening new credit accounts frequently: Every time you apply for a new credit line, an inquiry into your credit history is made. Each inquiry can drop your credit score down a bit
So, even though filing bankruptcy is considered a "negative" on your credit report (and will be visible to creditors for seven to ten years), it may not hurt you as much as continuing careless credit habits.
Credit After Bankruptcy
After choosing to file bankruptcy, many filers are reluctant to take on any credit at all. They often think they're more likely to "stay out of trouble" if they have no temptations.
In contemporary America, though, you need credit to get by. Any time you try to make a significant purchase (car, house, etc.), you'll likely need a loan. And the way lenders know whether or not to offer you money is by checking your credit report.
If you've not used any form of credit since your bankruptcy filing (even if you've been diligent about paying all your bills), creditors will have no way of knowing what kind of borrower you are and will be unlikely to lend to you.
Immediately after filing bankruptcy, you will probably qualify for higher interest rates and terms of borrowing that aren't especially favorable. But over time, the offers will probably be more appealing.
How to Rebuild Credit
Be patient. The first credit offers you receive are likely to be dangerous borrowing tools. Many come with high interest rates, exorbitant fees, processing charges and other sure ways to return to debt. You may have to wait a few months (or even longer) after filing bankruptcy to take out a credit card with beneficial terms.
Shop around. There are credit cards out there beyond what comes in the mail. Research available credit cards on the Internet to discover one with a reasonable interest rate and a limit that makes sense to you.
Take it step by step. You probably didn't get into serious debt overnight and you can't build strong credit that quickly either. Make small, regular charges on your cards and pay your bills in full, on time. In a few years (but not a full ten!), you should see your credit drastically improve.
The Good News
As you take steps to rebuild your credit, take heart: the recent activity on your credit report is usually viewed as more important than older activity. This means that, as you carefully work toward strong credit, your lenders will likely take note.
While on the subject of bankruptcy and credit issues, the following articles can help you investigate options to get your finances under control:
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