How does bankruptcy affect your credit history?
If you have failed in all your attempts to pay back your debts, then filing bankruptcy may be the only viable option for you. Bankruptcy is a federal court procedure with the help of which you can either get rid of your debts or repay them under the protection of the bankruptcy court. You can file your case under chapter 7 or chapter 13, depending on your financial condition. Though there are a number of positive aspects of filing bankruptcy, yet it will adversely affect your credit report and your credit score is sure to drop down significantly.
How filing bankruptcy affects credit score
Your credit score depends on your overall credit history. Bankruptcy can cause a major negative impact on your credit history and therefore, adversely affect your credit score. It can reduce your credit score by 200-300 points, irrespective of the fact that you�re filing bankruptcy under chapter 7 or chapter 13. Therefore, if you have a score of 750 points, it can drop down to about 500-550 points. However, if your credit score is relatively low, bankruptcy will not have much effect on your score. The better your credit score before filing bankruptcy, the more it is likely to drop.
Another aspect determines the affect of bankruptcy on your credit score. If you have multiple loans and are current on the monthly payments, then bankruptcy will have relatively less impact on your score. As for example, if you have credit cards and car loans and repay your debts on time, then the adverse effect of bankruptcy can be reduced to some extent. It�ll be considered just a single negative point in respect to your positive credit history throughout.
How long a bankruptcy affects your credit report
Bankruptcy continues affecting your credit report for some years. It remains on your credit history for 10 years if you file chapter 7. However, a bankruptcy remains on your credit history for a maximum of 7 years if you file chapter 13. You may get a mortgage if you�ve filed bankruptcy under chapter 13 but it is impossible to get a mortgage loan for 2 years if you�ve filed bankruptcy under chapter 7. But, the effect of bankruptcy starts diminishing from the day the case is discharged or dismissed.
How to improve credit history after filing bankruptcy
If you�re thinking that a bankruptcy would always mean a credit denial whenever you apply for a loan, then you�re wrong. You can establish a positive credit history and reduce the negative impacts of bankruptcy to a significant extent. Go through the 5 points that discuss effective ways of improving your credit score after bankruptcy.
1) Obtain a copy of credit report � Get an updated copy of your credit report and check whether or not all discharged debts are listed. Continue checking your report from time to time and also immediately fix problems if there�s any.
2) Avoid repeating mistakes � It is quite necessary to learn from your mistakes so that you don�t repeat it in future. Learn to budget and make wise financial decisions.
3) Repay your debts on time � It is really important to pay back your debts on time. You should also make full monthly payments towards clearing your debt. Inform the credit bureaus through written application that you are current on your payments.
4) Apply for a credit card � Though it is difficult to get a credit card after filing bankruptcy, yet you can acquire one with low spending limit and high interest rate. Try to use only 50% of your available credit limit.
5) Get a secured credit card � It�ll be easier for you to get a secured credit card and pay full balance every month. It will help you in getting a regular card after about 2 years.
It is always advisable to avoid bankruptcy. Even if it�s inevitable, discuss with a bankruptcy lawyer before filing your case. The laws keep on changing from time to time. Therefore, a lawyer will be able to explain your legal rights in a better way. He can probably help you in getting control over your finances and recover from insolvency, as fast as possible.
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