Will filing for bankruptcy ruin my credit?
When weighing the possibility of bankruptcy, the consequences of filing are often a major concern for my clients. While bankruptcy offers the relief of debt discharge, it also brings with it uncertainties regarding the accessibility of future loans. How will bankruptcy affect my credit score? When will I qualify for a mortgage after bankruptcy? Will I be able to get a car loan or a credit card? These are all valid concerns that my clients bring to my attention, and to be honest, I don’t always have a precise answer to give them.
The process of rebuilding credit after bankruptcy is unique to each individual and therefore giving exact time frames is often inappropriate. However, I can offer my clients some ideas and suggestions, which I will share with you below:
Your credit score is likely to be affected – It is generally true that filing for bankruptcy will have a negative impact on your credit score, and therefore your ability to obtain loans, for a period of time directly after filing . However, many of my clients who have chosen bankruptcy do so as a last resort. They already have payment problems such as late payments, high balances, defaults, and collection accounts. If your credit score has already taken a few hits, filing for bankruptcy may not have as big of an effect as one might imagine. According to John Ulzheimer, president of Credit.com Educational Services, some consumers may even see a slight increase in their magic number.
Plan for a Multi-Year Rebuilding Period: A bankruptcy will stay on your credit report for more than 10 years. That said, many clients see an increase in their score to pre-filing levels within 2-4 years. The exact length of this time period depends on numerous factors, including the current credit climate that is completely out of your control. However, it can be speeded up with a few tricks.
Clean up your credit report: After paying off debts, be sure to check your credit report. You have the right, under federal law, to have the balance of each canceled debt changed to $0. While the payment history will remain, it will no longer show any liabilities with these companies. If this is not the case, be sure to contact all three major credit bureaus and correct these errors.
Pay your bills early each month – Organize your finances and create a budget that allows you to pay all your bills early each month. During this time of rebuilding, you can’t afford the small hits to your credit report that often come with late payments. Another thing to keep in mind is that while autopay features are convenient, they often lead to confusion like overdrafts and payment declines. If you think this is even a long shot, pay your bills manually.
Don’t Give Up Credit: To rebuild your credit, you need to show lenders that your tax situation has improved and that you can now successfully manage loan accounts. Give credit a tight rein In today’s economy, it’s often easier said than done. However, it is possible. Some debts cannot be discharged and many clients will choose to reaffirm a loan or credit account and thus keep it active after presentation. Pay these loans religiously each month. Another option is to consider revolving credit accounts. Many companies, such as retail stores and gas stations, issue credit cards. If you don’t qualify for one yourself, apply as an authorized user under the account of a family member who agrees. A final option is to apply for a secured loan from your bank or credit union. Such loans exist specifically for credit rebuilding and often require you to secure the loan with an equivalent monetary sum. When you successfully repay the loan, that money will be returned to you.
Recovering from bankruptcy requires some patience, but it’s often easier than people realize. Starting over with a clean slate means you’re no longer mired in past debt. The most important thing to do is recognize what preceded your need to file and change your habits so that this situation can be avoided in the future.
