Filing for bankruptcy is one of the more serious thing to consider. People and businesses file for bankruptcy when they are unable to pay their debts, and it essentially wipes out all or a portion of that debt and presents a clean slate. It’s always a worst case scenario option, however, due mostly to how damaging it can be to your credit score.
Here’s all you need to know about filing for bankruptcy and how it effects your credit score.
On The Record
One huge thing to keep in mind when considering bankruptcy is that it stays on your record for a long time. Chapter 7 bankruptcy in particular stays on your record for 10 years, while chapter 13 stays on for 7 years. It can bring a good credit score down significantly in points, and severely damage your credit history on a long term basis.
“Consumers should be aware that declaring bankruptcy has the greatest single impact on credit scores,” Rod Griffin, Experian’s Director of Public Education, told credit.com. “When you declare bankruptcy, you take legal action so that you do not have to repay your debts, or only have to repay a portion of them. While you are no longer responsible for your debts, the fact remains that you did not pay them.”
There is a silver lining to this, however. Once you file for bankruptcy and your debts are cleared, you are immediately able to bounce back, so it won’t prevent you from rebuilding your credit aside from affecting your score negatively. Keep in mind that a low score, as well as a bankruptcy on your record, can prevent you from getting loans, taking out credit cards and buying homes and cars.
How To Bounce Back Quickly
If you’ve filed for bankruptcy and are looking to start rebuilding your credit, there are several things you can do that are relatively simple and have a quick impact on your score.
The most important thing you can do is to get new credit cards. Because of the bankruptcy, it might prove difficult to get approved for unsecured cards — in such a case, you should consider a secured card. Secured cards are specifically designed for people looking to improve their credit.
What you do is put down a deposit (usually a few hundred dollars), and use that as a line of credit. If you don’t make your payments, the deposit protects you from negatively impacting your history. This is different from a prepaid card in that the deposit serves as a security blanket and helps build credit, whereas a prepaid card does not help your credit.
“Secured credit cards are obviously a good choice,” Carlos Colon, financial education program manager with nonprofit financial coaching organization Mpowered, told the Huffington Post. Depending on the bank or credit union — and I like to advocate for credit unions because they are nonprofits — they may have some requirements in terms of how long the bankruptcy has passed.”
Another thing you can do is what’s known as piggybacking. Piggybacking is what happens when you’re an authorized user on someone else’s credit card — meaning that the behavior on the card reflects in your score as well as person responsible for the card. Authorized users can be family or a trust friend, depending on who is willing to help you with rebuilding post-bankruptcy.
Consider Your Options
Before taking a drastic step like filing for bankruptcy, always consider the consequences and weigh your options. What got you to the point of considering it in the first place? Is it truly your only way out of debt? Will getting rid of debt be worth the severe, negative impact it has on your credit score? Asking yourself these important questions is critical if you’ve thought about filing. Do your research and make sure that it’s the next logical step for you.