Filing for bankruptcy provides struggling debtors with a valuable legal process to get a desperately needed fresh start when they are unable to pay back all their overwhelming debts. However, this reset comes at a steep price – bankruptcy can have a severely negative impact on your credit report and score for years, affecting your ability to obtain financing, credit cards, affordable insurance coverage, employment, and even housing down the line.
Just how long does bankruptcy wreck your credit? What exactly can you do to rebuild credit scores from the bankruptcy hole? How should you consider working with a bankruptcy attorney bankruptcy attorney? In this blog post, we answer some common but critical questions surrounding how long bankruptcy stays on your credit history, and actionable steps you can take to repair credit after bankruptcy.
Types of Bankruptcy Filings
When it comes to personal bankruptcy filings, there are two primary options under the bankruptcy code – Chapter 7 and Chapter 13. Each carries pros and cons to weigh with your attorney.
Chapter 7 Banruptcy
Chapter 7 bankruptcy, also commonly known as a straight or liquidation bankruptcy, involves liquidating most of your non-exempt assets that can be sold, including cash, investments, luxury items, second cars, rental properties, etc.
Any proceeds from selling these assets in Chapter 7 go toward paying off as much outstanding debt as possible. However, you are allowed to retain exempt property like a primary home, vehicle, and basic necessities. With the remaining eligible debts discharged, Chapter 7 allows the filer to make a fresh start. But the liquidation can be financially painful.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also known as reorganization bankruptcy. It involves creating a repayment plan that lasts for three to five years, during which you pay a portion of your debts to your creditors. The rest of the debts are then discharged by the court. Chapter 13 bankruptcy is usually suitable for people who have a regular income and want to keep their assets.
Both types of bankruptcy have advantages and disadvantages, and they have different eligibility requirements and legal consequences. You should consult a qualified bankruptcy attorney from Ware Law Firm before filing for bankruptcy to determine which option is best for your situation.
How Long Does Bankruptcy Stay on Your Credit Report?
The length of time that bankruptcy stays on your credit report depends on the type of bankruptcy you file and the credit bureau that reports it. Generally speaking, Chapter 7 bankruptcy stays on your credit report for 10 years from the date of filing, while Chapter 13 bankruptcy stays on your credit report for seven years from the date of filing or until the completion of the repayment plan, whichever is longer.
How Does Bankruptcy Affect Your Credit Score?
Your credit score is a numerical representation of your creditworthiness, based on the information in your credit report. It ranges from 300 to 850, with higher scores indicating better credit. Your credit score is calculated using various factors, such as your payment history, credit utilization, length of credit history, mix of credit types, and new credit inquiries.
Bankruptcy can have a significant negative impact on your credit score, as it indicates that you have defaulted on your financial obligations. The exact amount of points that your credit score drops after bankruptcy depends on several factors, such as your pre-bankruptcy score, the amount and type of debts involved, and how you handle your credit after bankruptcy.
How Can You Rebuild Your Credit After Bankruptcy?
Although bankruptcy can damage your credit for a long time, it is not the end of the world. You can still take steps to rebuild your credit after bankruptcy and improve your financial situation. Here are some tips to help you recover from bankruptcy and boost your credit score:
- Review your credit reports. As mentioned earlier, you should check your credit reports from all three major credit bureaus regularly to make sure that they are accurate and up-to-date. If you find any errors or discrepancies, such as incorrect dates, amounts, or statuses of your accounts, you should dispute them with the credit bureaus as soon as possible. Correcting any errors can help you improve your credit score and avoid any potential problems in the future.
- Pay your bills on time. Your payment history is the most important factor in your credit score, accounting for 35% of it. Therefore, you should make sure that you pay all your bills on time and in full every month, including your mortgage, rent, utilities, phone, internet, insurance, and any other obligations. Paying your bills on time can help you establish a positive payment history and show that you are responsible and reliable with your finances.
- Use credit wisely. After bankruptcy, you may have difficulty getting approved for new credit cards or loans, as lenders may consider you a high-risk borrower. However, you can still use credit to rebuild your credit score, as long as you use it wisely and sparingly. ou make them on time and in full every month.
- Keep your credit utilization low. Your credit utilization is the ratio of your total credit card balances to your total credit card limits, expressed as a percentage. It is another important factor in your credit score, accounting for 30% of it. Therefore, you should keep your credit utilization low, preferably below 30%, to show that you are not overusing or maxing out your available credit. You can lower your credit utilization by paying off your balances in full every month, requesting a higher credit limit (but not using it), or using multiple cards with low balances instead of one card with a high balance.
- Avoid applying for too many new accounts. Every time you apply for a new credit card or loan, the lender will perform a hard inquiry on your credit report, which can lower your credit score by a few points. Hard inquiries also stay on your credit report for two years, although they only affect your score for one year.
- Monitor your progress. Finally, you should monitor your progress and track your improvements over time. You can use various tools and services to check your credit score and report regularly, such as free weekly credit reports from all three major bureaus until April 2023, free monthly FICO scores from some banks and lenders, or free annual VantageScores from some websites.
Bankruptcy is a serious decision that can have lasting consequences on your credit report and score. However, it does not mean that you cannot recover from it and rebuild your credit especially if you get assistance from reputable Ware Law Firm in Mississippi. By following the tips above, you can gradually improve your financial situation and achieve your goals.