Does bankruptcy ruin my credit?
The decision of whether to file for bankruptcy protection is not an easy one. Among the numerous concerns, one that typically worries most consumers is the concern that your credit rating might be so damaged by the bankruptcy that securing a loan post-bankruptcy even at a high interest rate might be impossible.
But here's something you may not have thought of: In many cases, the damage done to one's credit score isn't nearly as bad as expected. Over the long run, obtaining a score high enough to make you eligible for competitive rates isn't out of the question.
Part of the reason that your score isn't likely to suffer all that much is that most consumers seriously struggling with debt aren't exactly maintaining a superior score to begin with. In the majority of cases problems such as late payments, high balances, charged-off balances, collection accounts, or judgments will have already taken their toll on the person’s credit score.
For this reason, some people may even see a minor boost in their credit scores after filing bankruptcy. Why might this be so? Fundamentally, your credit report is largely wiped clean when you declare bankruptcy. Your high balances are removed as are any late payments or records of unpaid debts. Instead, the accounts included in the bankruptcy will be marked as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 Wage Earner Plan," depending on which type of bankruptcy you filed. Both types of bankruptcy affect your credit score in the same way. You aren't likely to see a big jump, but if you've just been getting by, your score isn't likely to fall much further.
A bankruptcy could help your score over the long term, as well. When calculating scores, the formulas developed by the major scoring company are set up to grade someone's credit standing as compared with that of consumers in a similar financial position. To do that, consumers are divided into groups. Consumers within each group are then ranked against others in the group. One of these groups is bankruptcy filers.
Thus, when you file bankruptcy your score is determined based on how you do compared with other bankruptcy filers. As a result, credit scores can vary widely among bankruptcy filers. You won't be able to bring your score up to a perfect 850 as long as your bankruptcy stays in your report (the fact that you filed bankruptcy will remain on your report for up to 10 years), but with good credit management after filing, a score in the 700s isn't impossible.
If your debt payments are crushing you, bankruptcy will give you a much-needed fresh start. And with a few clever credit repair strategies, your score could be back in the 700s within two or three years. Here are some tips on how to raise your credit score as quickly as possible after declaring bankruptcy:
Get a new credit card after your bankruptcy. This is the most important step in your bankruptcy recovery. If you can't get approved for an unsecured credit card, start out with a secured card. With a secured card, you will make a deposit with the credit-card issuer, which will in essence be your credit limit. Typically, after a year to 18 months of on-time payments, you could "graduate" to a regular, unsecured credit card.
Piggyback on a friend or relative’s good credit. If you have a trusted friend or relative, ask them to make you an authorized user on one of their credit cards. Your bankruptcy won't affect your friend or relative’s credit, but you'll automatically get the account history for that card in your report.
What about auto loans and mortgages? You can start shopping for auto loans as soon as a few months out of bankruptcy. Traditional banks are likely to turn you down, but the financing people at the dealership may be more lenient, especially if they're in a bind to meet sales quotas. Don’t expect a low interest rate; however. Mortgage lenders will want to see at least two years of good credit behavior post-bankruptcy before granting you a mortgage.
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But here's something you may not have thought of: In many cases, the damage done to one's credit score isn't nearly as bad as expected. Over the long run, obtaining a score high enough to make you eligible for competitive rates isn't out of the question.
Part of the reason that your score isn't likely to suffer all that much is that most consumers seriously struggling with debt aren't exactly maintaining a superior score to begin with. In the majority of cases problems such as late payments, high balances, charged-off balances, collection accounts, or judgments will have already taken their toll on the person’s credit score.
For this reason, some people may even see a minor boost in their credit scores after filing bankruptcy. Why might this be so? Fundamentally, your credit report is largely wiped clean when you declare bankruptcy. Your high balances are removed as are any late payments or records of unpaid debts. Instead, the accounts included in the bankruptcy will be marked as "Included in Chapter 7 Bankruptcy" or "Included in Chapter 13 Wage Earner Plan," depending on which type of bankruptcy you filed. Both types of bankruptcy affect your credit score in the same way. You aren't likely to see a big jump, but if you've just been getting by, your score isn't likely to fall much further.
A bankruptcy could help your score over the long term, as well. When calculating scores, the formulas developed by the major scoring company are set up to grade someone's credit standing as compared with that of consumers in a similar financial position. To do that, consumers are divided into groups. Consumers within each group are then ranked against others in the group. One of these groups is bankruptcy filers.
Thus, when you file bankruptcy your score is determined based on how you do compared with other bankruptcy filers. As a result, credit scores can vary widely among bankruptcy filers. You won't be able to bring your score up to a perfect 850 as long as your bankruptcy stays in your report (the fact that you filed bankruptcy will remain on your report for up to 10 years), but with good credit management after filing, a score in the 700s isn't impossible.
If your debt payments are crushing you, bankruptcy will give you a much-needed fresh start. And with a few clever credit repair strategies, your score could be back in the 700s within two or three years. Here are some tips on how to raise your credit score as quickly as possible after declaring bankruptcy:
Bouncing Back After Bankruptcy
Make sure all the accounts you included in your bankruptcy are listed as such, and show $0 balances if you filed Chapter 7. If a creditor continues to report the account as delinquent (which they shouldn't), your credit score would suffer.Get a new credit card after your bankruptcy. This is the most important step in your bankruptcy recovery. If you can't get approved for an unsecured credit card, start out with a secured card. With a secured card, you will make a deposit with the credit-card issuer, which will in essence be your credit limit. Typically, after a year to 18 months of on-time payments, you could "graduate" to a regular, unsecured credit card.
Piggyback on a friend or relative’s good credit. If you have a trusted friend or relative, ask them to make you an authorized user on one of their credit cards. Your bankruptcy won't affect your friend or relative’s credit, but you'll automatically get the account history for that card in your report.
What about auto loans and mortgages? You can start shopping for auto loans as soon as a few months out of bankruptcy. Traditional banks are likely to turn you down, but the financing people at the dealership may be more lenient, especially if they're in a bind to meet sales quotas. Don’t expect a low interest rate; however. Mortgage lenders will want to see at least two years of good credit behavior post-bankruptcy before granting you a mortgage.
Return to Bankruptcy Information