Though filing for bankruptcy can be a stressful and even frightening experience, one of the biggest concerns people in this position have is the negative effect it will have on their credit. Not only will filing lower the credit score, but it will also make it difficult to secure loans or apply for credit cards in the future. But this is not a permanent issue, and eventually over time, credit can be rebuilt. Of course, how long bankruptcy stays on your credit depends on which type of bankruptcy is filed.
With a chapter 7 bankruptcy, a person’s non-exempt assets will have been sold, and the proceeds will have been divided among any creditors. This process may take a few months to complete. Over time, these debts will slowly lose their effect on a credit report, and within about 7 years, they should drop off completely. The bankruptcy itself will stay on a person’s credit report for 10 years before it is removed.
Once completed, a chapter 13 bankruptcy will stay on a person’s credit report for 7 years. The discharged debts will also remain on a credit report for 7 years, but this time begins after they have been discharged. These debts will continue to be active until the completion of the 3 to 5 year payment plan agreed upon when filing for bankruptcy. This means that any discharged debts could stay on a person’s credit report for a few years longer than the bankruptcy itself will.
How to Rebuild Credit
Despite which type of bankruptcy a person has filed for, it is important to begin to rebuild credit as soon as possible. There are a few ways to do this, but remember to be careful when choosing between these options, so the issues that led to the bankruptcy in the first place are not repeated.
Credit Cards – Though it may seem strange, there are many credit card companies that will send offers out to those who have recently completed bankruptcies. There are some companies that will actually prey on people who are desperate to rebuild credit, and these types of cards should be avoided, because they may come with high interest rates and fees that will cost a person far too much to be able to actually use the card. Of course, there are legitimate banks that understand those who file for bankruptcy will not be able to do so again for several years, and believe the risk of offering that person a credit card is quite low. The best options for those trying to rebuild credit is to consider a secured credit card. These require a person to give the company a certain amount of money in advance, to be kept as collateral. The amount on the credit card is equal to the amount of collateral given, and only that much can be spent on the card. There are fees included in many of these as well, so be sure to read the application closely before applying, to be sure it is worthwhile. Store credit cards are also an option, because it is easier to qualify for them, but they can also have high fees and interest rates.
Car Loans – A car loan is usually easier to get than other loans, especially if the person applying can make a large down payment. If it is possible to save the money, it is best to shop for a car about 6 months after the bankruptcy is completed, so the loan can be secured and credit can start being rebuilt right away.
Though rebuilding credit is important, it is not a good idea to apply for numerous new credit cards or loans all at once. Instead, spread out any applications, and be sure to pay off the accounts in full every month. This is easier to do if there are only a few accounts to manage, especially if a car loan or a mortgage has been applied for. If a person is trying to apply for too much credit at once, many banks will see this as risky behavior, and may not allow the loan or mortgage to go through.
Keep Oldest Accounts Active
Just because a person has filed for bankruptcy, it does not mean that they always had bad credit. In fact, older items on a person’s credit report can actually help the credit score after they have filed for bankruptcy. This is because the length of a person’s credit history makes up about 15% of their credit score. This number is usually not affected when bankruptcy has been filed. That’s why keeping these older accounts active is important, so they can help to maintain the length of a person’s credit history, and help them to rebuild the credit score faster.
Though damaging to a person’s credit, filing for bankruptcy is not the end of the world. Rebuilding credit by being responsible with money and debt, and keeping a close eye on the credit score, can eventually lead to a fantastic credit report, and more options for better loans and lower interest credit cards in the future.