Being deep in debt is not an easy situation to face. Many times, consumers continue to try to make payments and find a solution to their debt other than filing bankruptcy. But at a certain point, it is important to understand that even having a bankruptcy on a credit report can be the beginning of the solution to your financial issues.
It is true that any bankruptcy on a credit report can remain for up to ten years but it also gives you the ability to begin to rebuild your credit during that time. Continuing to make late payments, missing payments and getting deeper in debt due to penalties and high-interest rates will never allow you the ability to pay off your debt and rebuild your credit score. So in that case, filing bankruptcy can provide you with a realistic solution to your debt and a new financial beginning.
Does It Matter What Type of Bankruptcy I Declare?
There are two different types of bankruptcy which are related to personal debt. Chapter 7 is the fastest type to process. It will discharge within a few months of your filing as long as you qualify for the terms. Chapter 13 requires a 3- 5 year repayment plan and is not considered completed until the repayment period is completed. But both types of bankruptcy have basically the same impact on your credit score. The thing to remember is that with the Chapter 13 bankruptcy, you are agreeing to repay your debts over a long period of time instead of simply having them wiped from your credit history. When you begin to work on reestablishing credit after a bankruptcy, some lenders will look at Chapter 13 as a more responsible path and will be more likely to offer you some credit.
How Far Will My Credit Score Drop?
It is a given that declaring bankruptcy will have a negative impact on your credit score. But there is not set point value that will be deducted from your credit score after a bankruptcy. In the past, studies have been done with mock credit scores to illustrate the possible impact depending on different consumer credit scores.
In one case the consumer had a score of 780 prior to their bankruptcy and their score dropped about 240 points to a score of 540. Another case showed that a beginning score of 680 dropped to around 530 after a bankruptcy. The consumer with the higher starting credit score did suffer a greater drop in score but both consumers ended with roughly the same credit score of near 530. Again, these are meant to be simply examples and your specific credit score could be different.
Can Bankruptcy Ever Help My Credit Score?
Bankruptcy itself will never actually improve your credit score. But it can make it easier for you to begin working on improving your credit score. Bankruptcy in many ways is a fresh financial start because it removes many types of debt. It provides you with an instantly better debt to income ratio, it makes your monthly bills more manageable so that you can begin to make payments on time and it allows you to create a budget that works to begin rebuilding good credit. So the bankruptcy itself does not improve your credit score but it does provide you with the ability to quickly begin the process of rebuilding your score.
How Can I Rebuild My Score After a Bankruptcy?
Many consumers are under the false impression that after a bankruptcy they will not be able to borrow money. The truth is that many credit card companies will be eager to offer you a card after bankruptcy because they know that you can’t file again for seven years. But they are not doing this simply to help you out, they are doing it to make a lot of money from your misfortune. The credit that they will offer you will carry with it a substantially higher interest rate than if you had good credit.
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If you need to purchase a vehicle after a bankruptcy, you will be able to but you will most likely only qualify for what is called a subprime loan. This means that the loan will have a much higher interest rate and it might also have other special terms such as a higher down payment or shorter term. So credit will be available to you to allow you to rebuild your credit score but it comes at a higher price than it would have before you declared bankruptcy.
It can be looked at as the price that you must pay for a fresh financial start, and hopefully it will be the motivation you need to work diligently to improve and maintain a good credit score in the future.
Other Ways to Repair Your Score
Getting a loan or a credit card after bankruptcy might not seem like such a good idea but it is a great way to begin rebuilding your credit score immediately. It is also important that you do a few things to ensure that you are building a good score. Keeping all of your bills current is a huge factor in creating a strong payment history.
You will also want to focus on paying off any outstanding debt so that you have a low debt to income ratio. And be careful not to apply for too many different loans too rapidly. Length of credit history and number of new requests are important aspects of your credit score. In addition, it is important that you take the time to review your credit report on a regular basis.
As you begin to create a good payment history, you want to be assured that the information is being correctly reported and that it is helping to improve your score. At the end of the seven years after your bankruptcy, you will also want to verify that is has been removed from your credit report and all that remains is your current information. Having a bankruptcy on your credit report is not the end of the world. There are ways that you can work to improve your credit score once you understand the issues created by a bankruptcy on a credit report.
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