How Does Bankruptcy Affect Your Credit?
Bankruptcy is a good solution for some people struggling with debt, but it can also affect your life in many ways. It’s important to understand the possible consequences, as well as any potential alternatives, so you can make the decision that’s right for you. Often people ask about the effects of bankruptcy on their credit score, so here are some things to keep in mind about bankruptcy and credit:
Ask a Bankruptcy Attorney: What is Bankruptcy by Definition?
Bankruptcy is the process of dealing with insurmountable debt by having it erased by the court, or by setting a plan to pay some or all of it on more favorable terms over a three-to-five-year period. When you file for bankruptcy, you are telling the court you can’t pay your bills and need the court’s help in dismissing them or making a payment plan. There are multiple types of bankruptcy, but the two most common ones for individuals are these:
- In a Chapter 7 bankruptcy, most of your debt is relieved, with the exception of non-dischargeable debt like student loans, alimony or child support, and government debt like back taxes. Any significant assets will likely be liquidated, but in some cases you will be allowed to keep your house, car, household furnishings and retirement assets. If you still have debt on these, you will need to “reaffirm” and continue paying it even after your bankruptcy.
- A Chapter 13 bankruptcy focuses on finding ways to facilitate eventually paying off all or most of your debt, even if it’s over a longer time period than the creditor would want. In this option, you can keep your assets as long as you continue paying any outstanding debt on them.
How Long Does Bankruptcy Stay on Your Credit Report?
A Chapter 7 bankruptcy will last ten years on your credit report, and a Chapter 13 bankruptcy will persist for seven years. The next question people often have for a bankruptcy attorney is, “How will this affect my credit score?”
The answer depends somewhat on your current credit score. According to credit.com, a typical bankruptcy can cause a high credit score to sink by up to 200 points. An already lower score will drop by 130-150 points. Ironically, you lose fewer points if your credit score is already in need of repair. Generally, by the time a person considers bankruptcy, they’ve already lost some points on their score due to late or missed payments. Depending on how long you’ve been struggling to pay your bills, and what your score was prior to your financial challenges, you may still have a good score, or you may not.
What is a Good Credit Score?
Credit scores vary between 300 and 850. It’s important to know that not all lenders use the exact same criteria for deciding whether to extend credit. Some may approve you with one score while another may turn you down. But in general, credit scores are ranked like this:
- Anything below 580 is considered a “poor” credit score.
- Scores between 580 and 669 are usually deemed “fair.”
- From 670 to 739 is considered the “good” range for credit scores.
- 740 to 799 ranks as “very good.”
- Anything higher than 800 is deemed “excellent.”
Again, individual lenders have different requirements, and you don’t necessarily need an excellent or even good credit score for every lending situation, but it’s never a bad thing to have a higher score.
How to Check Your Credit Score
There are many ways to do this. You can pay to get your score from the three major credit providers, but if you currently have credit cards or a loan, you may be able to get your score for free. Check your statement or log into your account and you might be able to find it there. If that doesn’t work out, there are many sites that provide free credit reports, but you’ll want to make sure you visit a reputable one. You may get one free credit report from each reporting agency by using the link below.
- www.annualcreditreport.com will give you a free report once every twelve months.
How to Improve Your Credit Score After a Bankruptcy
The sooner you get back to paying your bills on time, and paying off debt if you chose a Chapter 13 bankruptcy, the sooner your credit score will improve, even with the bankruptcy on it. Additionally, avoiding new debt may be helpful, as credit scoring also takes into account your debt-to-income ratio. In other words, having a large amount of debt compared to your income will lower your score. You don’t have to avoid all new debt forever, but getting some of your existing debt paid down before you take on more debt is a good idea.
If you did a Chapter 7 bankruptcy, you may have had all or most of your debt wiped out. In this case, it’s okay to take on some new debt right away, but be sure you’ll be able to make the monthly payments on it.
Some people worry they will not be able to get credit at all after bankruptcy. But because of how bankruptcies work, some lenders actually will extend credit because they know you can’t go bankrupt again for several years. That means you have to pay them back! The bad news is that your interest rates may be higher because of the bankruptcy and a lower credit score. Again, this is a good reason to stick with an amount of debt you can pay off relatively quickly, to reduce the amount of interest you’ll pay.
New Mexico Financial & Family Law: How a Bankruptcy Lawyer Can Help You
Considering bankruptcy can be stressful and you may be overwhelmed with questions and concerns. For some people, bankruptcy can pave the way to a new start, but it is not the right solution for everyone. In certain situations, making a payment plan with creditors without a bankruptcy filing may work out better. A bankruptcy lawyer at New Mexico Financial and Family Law will answer questions and lay out your options so you can make the best choice for your situation. We can also assist you if you want to file for bankruptcy or explore other options. Please contact us today at (505) 503-1637 for a free consultation.