Bankruptcy is not something anyone should take lightly, and should only be used as a very last resort for relieving a person’s debt. The effect it has on your credit score is never good, but the degree to which it is affected will ultimately depend on the score you had prior to filing for bankruptcy.
Why Credit Scores Drop
Credit scores drop when you have a high debt-to-asset ratio, which means that you have more debts than you do assets. Having delinquent payments on your accounts also takes a toll on your score. The good news is that if you already have a low credit score before filing, then your score will likely only take a mild hit.
However, if you’ve managed to keep a high score and file for bankruptcy, then it will take a dramatic dip. In truth, bankruptcy is the worst negative record a person can have on their credit score.
Consequences of Bankruptcy
Loan approval and credit cards can be extremely difficult to obtain after you’ve filed for bankruptcy. You may be able to modify your current loans, but getting new ones will be very challenging. That’s not to say that bankruptcy isn’t a viable option for those who are in extraordinarily deep debt, but it’s important to keep the consequences in mind.
Bankruptcy is not at all a quick-fix solution. It may also be wise to hold off on bankruptcy if you are unemployed. Employers can legally check your credit score, and it could sway their decision to hire you.
The 7 Year Rule
Bankruptcy is not forever. The negative factors of it will fall off your FICO score after 7 years from the date it was filed. Creditors may also only check your score as far back as 7 years. So once this magic number has been reached, you’ll be totally free from bankruptcy and hopefully living a debt-free life.
How to Rebuild Your Credit
The best way to start rebuilding your credit after you’ve filed for bankruptcy is by making all of your payments on time and using a secured credit card. A secured credit card requires a cash collateral deposit, which acts as a credit line for that account and prevents you from overspending.
The monthly payments made on this card are still disclosed to the major consumer reporting agencies, making sure that your account history is put on your credit profile. Once your credit score is in good enough standing, you can apply for a traditional credit card and start reestablishing your credit more easily and without as much restriction.
The impact that bankruptcy has on your credit score lessens over time, and for some people, it is the only option they have left to reclaim their financial security. Always speak to an attorney before filing for bankruptcy. He or she will help you weigh your options and formulate a game plan to get you out of debt for good.