Filing for bankruptcy is one of the hardest financial decisions you can make, especially when you are unsure of the potential impact it can make on your credit score. It has many potential implications in your ability to get a job, where you can live, or even your personal relationships.
While it is true that bankruptcy can really negatively impact your credit score, the same can also be said if you don’t file for bankruptcy and allow all your debts to continue unsettled.
Bankruptcy is best considered as a last resort in paying-off debt. It allows you to liquidate your assets to pay off current debt, or even discard some debts and pay off others in order to get financial relief. But of course, while it does sound too good to be true, it really is too good to be true, which means it comes with its own set of drawbacks as well. Here are some of the potential drawbacks that may occur after you file for bankruptcy.
Types of Bankruptcy
Chapter 7 Bankruptcy. The filing of bankruptcy under Chapter 7 of Title 11 of the United States Code allows you to erase some of your debt. However, in order to pay off some of your creditors, the bankruptcy trustee will liquidate (sell off) some of your assets. That is why Chapter 7 bankruptcy is also called “straight” or “liquidation” bankruptcy.
Chapter 13 Bankruptcy. Bankruptcy filed under Chapter 13 is relatively more lenient than Chapter 7 as it allows the borrower to keep all of his assets, provided that he follows a strict debt repayment or settlement plan. Also known as “reorganization” or “the wage earner” bankruptcy, it’s a bankruptcy “plan” for those with enough income to repay part or all of their debts without liquidation. This applies to those with debts that have trouble dealing with demands for immediate repayment, rather than the lack of means to repay the debt.
Effects of Bankruptcy on Your Credit
Perhaps the biggest impact bankruptcy can make on your credit card is by appearing on your credit report as a derogatory remark – and a big one at that. In fact, some people have reported that your credit score could plummet by as high as 200 points.
In reality, it is extremely difficult, maybe even impossible, to predict exactly how far your credit score will fall after you file bankruptcy. The degree to which your credit scores may fall will largely depend on where your credit currently stands now prior to filing. In fact, most people’s scores plummet because they allowed their debts reach a point where they’ve fallen behind so much on their payments that they’ve gone into a default or foreclosure status, or had legal judgments against them, which could cause one’s credit scores to nosedive. Upon reaching that point, bankruptcy may or may not reduce the scores further, depending on the time of filing.
Credit Sesame’s data states that users with bankruptcy on their credit report actually have slightly higher credit scores, on average, than users with negative marks like tax liens or legal judgments against them. Part of the reason is that bankrupt consumers often have sterling records of on-time payments when they are trying to reestablish a good credit standing, as opposed to people on the verge of bankruptcy who have dozens of missed payments, charge-offs, and collections.
What to Do After Filing
After deciding to file for bankruptcy, you have to understand that even though the mark stays on your credit report for 10 years, it isn’t forever. You will need to work on rebuilding your credit score soon after, which will involve building a positive payment history with new creditors or with any accounts that survived the bankruptcy. The best option for you after bankruptcy is to add positive information to your credit report. This means sticking to a perfect, or near-perfect, repayment schedule and maintaining a healthy credit account. In no time, you will begin receiving credit card offers again, on your way to achieving a good credit score.