What Happens to your Credit Score After Bankruptcy

What Happens to Your Credit Score after Bankruptcy

Most people think that declaring bankruptcy spells doom and gloom for your credit score, and that for the rest of eternity you will never be able to take out a loan again. The reality couldn’t be farther from the truth. While declaring bankruptcy does initially impact your credit score, it is not the end of the world. In fact, most individuals are able to build it back up rather quickly and have no issues down the road.

Initial Impact

The initial impact of declaring bankruptcy is the worst thing you can do to your credit; declaring bankruptcy will cause your score to plummet drastically. Say you have a good credit score of above 700; once you declare bankruptcy, the score could drop up to 200 points. For credit scores that are worse to begin with, the impact will be less, sometimes in the range of a 130-150 point drop. However, if you are at the point when declaring bankruptcy is your best option, this credit drop is more than likely the best option. Remember, credit scores are fixable and time is on your side! Failure to declare bankruptcy when you cannot make payments can have the same result anyway; if you begin to miss multiple payments your credit score will drop regardless.

Bankruptcy will also stay on your record for an allotted period of time, and will fall off after that time has passed. For chapter 7 bankruptcy, it will stay on your report for 10 years, while all other forms will stay on for 7 years. In the grand scheme of things, this is not very much time. While the bankruptcy will be there for those years, there are still actions you can take to begin to rebuild your credit score. Typically, if a lender sees that you have rebuilt credit but have a bankruptcy, they will typically lend you the money despite the bankruptcy.

What Can I Do to Re-Build Credit?

There are many things that you can do to begin to rebuild your credit score after declaring a bankruptcy. Say you take absolutely no proactive steps but continue to make a mortgage payment. When the time comes for the bankruptcy to come off of your credit report, you should have no issues ascertaining a loan. With credit, time heals all wounds. However some people cannot wait for their credit score to fix itself, and in those cases taking proactive steps is the most effective way to rebuild credit.

  1. Take out a starter line of credit. Most financial institutions offer an introductory line of credit of some sort. Taking out one of these is a tried and true way to rebuild your credit score. These will most likely be what is called a secured line of credit, which means that there will be some sort of collateral against the loan. Financial institutions will not be hesitant to give you one of these loans as you are guaranteed not to be a risk to them, despite a poor credit score.
  2. Get a secured or unsecured credit card. As with the secured line of credit, a secured credit card serves the same purpose, for you to get a loan with little risk to the financial institution. In some cases, you may be able to get a regular credit card and that may be a better option for you. If you are able to get one, the credit line will more than likely be a low amount, but it will be another tool to help you rebuild credit.
  3. Pay down outstanding loans. If you declare bankruptcy, most of your loans will go away. However, continuing to pay on loans that are still there like a mortgage will help you bring your credit score back up. Certain types of bankruptcy can restructure your debt rather than eliminate it, and if that is the case making sure you are paying on the new payment plan will help you immensely.
  4. Try to avoid closing credit card accounts. If you can prevent it, try to not close out your credit card accounts. Doing so will have negative implications on your credit score and may drop it further.

Bankruptcy is not the end for your financial welfare, rather it is more of a reset button. While there are some downsides to declaring it, the positive aspects may make it worth your while. Every case is different, and that is why having an expert bankruptcy attorney can make all the difference in making sure you are not just making the right decision, but that you can also get on your feet quickly. If you take proactive steps, you will be able to rebuild credit after a bankruptcy, and in most cases you will have a good credit score before the bankruptcy falls off of the credit report. If you are considering bankruptcy, please contact the Holland Law Group to make sure everything is done properly and you can have long term financial success.

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