For those in financial hot water, filing for bankruptcy might be your only option. While bankruptcy will allow you to discharge some or all of your debt, we all know that there are negative consequences as well, such as the damage to your credit score.
Speak with a bankruptcy attorney to see if you qualify.
The immediate impact to your credit score will be a drop of 100-200 points depending on your current score and the severity of your financial situation. There is no doubt that this drop will hurt, but the purpose of bankruptcy is to give you the opportunity to rebuild your credit, placing you in a better overall financial position.
In this blog, we will discuss exactly what this drop in credit means as well as give you tools to help rebuild. But first, let’s discuss the difference between a credit score and a credit report.
Credit Score Vs. Credit Report
Many people use “credit score” and “credit report” interchangeably, but contrary to popular belief, they are two different things. Your credit report is a 7-10 year compilation of all your credit activities. This includes mortgages, car loans, student loans, and payment history. This report is public knowledge, available to tax agencies, loan officers, and courts.
A credit score, on the other hand, is a three digit number calculated from your credit report. There are five components that are used to calculate this score: current debt, length of credit history, new credit, payment history, and types of credit used.
Your credit score number conveys to financial institutions whether you are a credit risk or not, and they use it to determine whether to give you loans or credit cards and at what interest rate. A high score in the 700s or 800s shows that you are a good investment who makes on-time payments while a low score in the 300s or 400s shows that you are a credit risk. Financial institutions may be hesitant to offer those with lower scores loans.
Now, filing for bankruptcy will lower your credit score regardless of its current number, but for many who claim bankruptcy, their score is already on the lower side. Bankruptcy gives them the chance for a fresh start and to rebuild.
What Does Bankruptcy Mean for Your Credit Score?
As we already discussed, bankruptcy lowers your credit score, but what does this lower score actually mean? What is the impact?
You May Be Deemed a Risky Borrower – A low credit score signals to financial agencies that you are a risky borrower and may not have the capacity to make on-time payments. As such, they will be hesitant to lend out money.
Difficulty Securing Loans – In addition to financial institutions being hesitant to give you loans, for a time, it may even be impossible to secure a loan. You may require approval from the court first.
High Interest Rates – If you do end up securing loans, it will be at high interest rates. This includes insurance rates, mortgages, car loans, and more.
You May Still Have Debt – While chapter 7 bankruptcy discharges all of your debt, chapter 13 only discharges a portion of it. This means that if you file for chapter 13, you will still have to make payments, but they should be significantly less.
Long-Term Impact – Because chapter 7 discharges all of your debt, its effect stays on your credit report and credit score for 10 years. In contrast, chapter 13 should only stay on your record for 7 years. This does not mean you cannot rebuild your score in the meantime, but it will take a while to get where you were.
How to Move Forward
While filing for bankruptcy should only be done if you have no other options, remember that it is not the end. In fact, it is a new beginning for you to start fresh, though your credit score and overall financial situation will take time to recover. It will require effort, perseverance, and financial responsibility, but here are some steps you can take to begin rebuilding your credit:
Pay Bills on Time – Do your best to never miss a payment on a bill or loan. Missed payments mean further damage to your credit score while continuous, on-time payments steadily rebuild it.
Open a Secured Credit Card – Secured credit cards are essentially prepaid cards. They require a cash deposit prior to use which makes up your spending limit. This allows you the security of knowing you have money in your pocket and increases your credit score when you make on-time payments.
Make Credit Card Payments in Full – Instead of only paying the minimum on your secured credit card, be sure to pay the full amount every month. Only paying the minimum is how debt accumulates under our noses, so by paying in full, you keep your debt to a minimum and work towards rebuilding your credit at the same time.
Create a Budget and Stick to It – Many who file for bankruptcy do so either because of an emergency like a medical bill they can’t pay or due to irresponsible use of their finances. While you can’t anticipate emergencies, you can take responsibility for your spending habits. The best way to rebuild your credit is to create a spending strategy and follow it. Don’t go over your allotted monthly spend and ensure you have the ability to pay your bills.
Overall Choice to File
Filing for bankruptcy may seem like the end of the world, but there is a light at the end of the tunnel. That light may be far ahead, but it’s there. You just need courage and financial responsibility to achieve it. And you don’t have to do it alone. In fact, you shouldn’t!
Reach out to the bankruptcy attorneys at Hines Law in Massachusetts for trusted advice on the best course of action to take. With several locations throughout the greater Boston area, our bankruptcy firms are easily accessible so that you can get the support and guidance you need in a timely manner. Visit us online to learn more or call to schedule a Free consultation and get started of you financial recovery.