Filing for bankruptcy is a serious option which has to be implemented after much deliberation and forethought. Many people do not rush to file a bankruptcy claim simply because they fear the consequences of such action on their credit score rating. In fact, many financial planners would advise you to file for bankruptcy as the alternatives would hurt your credit scores even more.
Bankruptcy is a totally negative option which will have an adverse impact on your credit score for many years. The Fair Credit Reporting Act requires that the information pertaining to bankruptcy should be declared in the credit report of an individual for upto 7 – 10 years from the date of filing. The number of years it is declared depends on whether you file for bankruptcy under Chapter 7 or Chapter 13.
The Impact of Bankruptcy
The extent of the impact on your credit score will depend largely on your credit status. If you already had accounts going into collections, filing a bankruptcy claim would not make a big dent in your credit score. However, the impact is greater for those with a good credit rating.
According to FICO, a person with a fairly good rating of 600-650 might experience a drop of about 150 points, while those with the highest ratings of 700 -800 will see their credit score taking a plunge of 220 -250 points. The final credit score, whatever the outcome, will be around 500 -540.
Bankruptcy under Chapter 7 and Chapter 13
Chapter 7 is the fastest and easiest method to discharge all your debts. Your properties and assets are disposed to pay your debts. If you hadn’t sufficient assets or income, your debts will be discharged and the accounts will show zero credit. On the other hand, Chapter 13 bankruptcy claim will last several years as it involves a three to five year payment plan. Your bankruptcy information will appear in your credit report long after you have discharged your debts.
The immediate impact of the bankruptcy claim will be a drop in credit rating. Not everyone will have a major hit on the credit score rating. After the discharge of debts in your bankruptcy case, the credit bureaus will take into account the proportion of credit discharged when computing. However, as long as the bankruptcy particulars are mentioned in the report, you will have difficulty obtaining credit. Especially, property and auto loans will be out of your reach. Soon after your bankruptcy claims are discharged, you might receive several offers from creditors for various loans. However, these credit facilities will come at a higher interest rate.
How to remedy the situation
Soon after the discharge of the bankruptcy time, dedication, perseverance and patience are the most important factors required to remedy the effects on the credit score. There are many options available post-bankruptcy to improve the credit score.
Increase your credit score by obtaining a secured credit card.
This credit facility is the easiest to obtain as credit card companies do not incur any losses or bear any risks. The credit card is obtained against a lump sum deposit. All payments are made from the money deposited. Care has to be taken to ensure you do not spend most of the money. You also need to topup the deposit to continue using the card.
Apply for an auto loan
This will not be possible immediately, but with perseverance and better payment history, your credit score will increase to a fairly good rating in perhaps two to three years post bankruptcy. Automobile dealers would prefer to give auto loans if you have a fairly good credit score as the loan is secured by the vehicle.
Keep your old accounts active
Credit history is an important segment of your credit report and contributes about 15% of your credit score. The longer the account is active, the greater the positive score. These accounts are not affected by your bankruptcy application.
Limit opening new accounts
New accounts history provides 10% of your credit score. Unless absolutely, try not to make applications for new credit at once. It is advisable to spread out the period of new applications to limit the dent on the credit score.
Although the history of your bankruptcy application remains in your credit report for a specified number of years, it will gradually disappear from the report as loans are discharged.You can monitor your finances and with better debt management, improve your payment history. This will in turn lead to better credit scores. It will require plenty of time and dedication, but you can still obtain loans or credit facilities for mortgages, cars.etc after four or five years.