Bankruptcy is a legal proceeding designed for people who are struggling with debt. The good news is bankruptcy may relieve your debt obligations. The bad news is it negatively affects your credit score.
In short, the effects of a bankruptcy stay with you for seven to 10 years, depending on which chapter you file. It’s difficult to get new credit during this time, but your score could start rebounding faster than you think. Here’s a closer look at what happens to your credit score when you file for bankruptcy.
Lower Credit Score
Bankruptcy is a public record listed on your credit report. No matter where your credit score was before you filed, you can expect it to go down after filing. If your score was relatively healthy before the bankruptcy, it could be hit harder than if you already had a poor score. The precise impact can vary, largely because of the different factors that make up a person’s credit score.
Denied Credit Applications
Before you filed, you probably struggled to make payments on your credit cards, medical bills, mortgage, or car loan. In fact, these may be the very debts you’re hoping to eliminate by declaring bankruptcy.
However, even after your financial burdens are lifted, and creditors stop harassing you for money, these accounts will remain on your credit report. They should be reported as “discharged,” “included in bankruptcy,” or similar language with a balance of $0. If you apply for credit, potential lenders will likely see this note when they perform a credit check, which may prompt them to deny your application.
Credit Recovery
Once your bankruptcy proceedings are complete, you can begin rebuilding your credit. It may require a few years of responsible credit behavior, but by taking the right steps, you can improve your score well before the seven- to 10-year period is up. Here’s what to do:
- Check your credit report for errors: Make sure the accounts that were discharged in bankruptcy are listed as such and that they have a $0 balance. Dispute any errors you find with the credit bureau that reported the erroneous information.
- Build credit with a secured credit card: This provides a credit limit equal to the amount of an upfront deposit. Only take out lines of credit you can afford, and pay back debts as agreed.
- Open a credit-builder loan: Rather than giving you money upfront, the lender puts funds in a savings account until you have made all the payments. Then, you collect the cash at the end of the loan term. On-time payments boost your credit score.
- Ask for reported rent payments: If you pay your rent on time, this could boost your credit. Ask your landlord to report payments to the three consumer credit bureaus.
If you’re looking for bankruptcy services in the Chicagoland area, please contact the bankruptcy lawyers at Cutler & Associates by calling (773) 360-5802. We offer free bankruptcy evaluations to help you confidently take the next step.