In the last few decades millions of people have filed for personal bankruptcy. Most of these cases were not caused by out-of-control spending but rather by financial hardship such as a job loss or overwhelming medical bills. In addition, many consumers who find it necessary to file for bankruptcy are lower-income individuals who simply can’t afford to deal with unexpected major expenses. For those who need to file, know that it is not the end of the world. You will recover. It may take a little time, but it will happen. One of the things that will take some time to rebuild is your credit score. Let’s take a closer look at the impact of a bankruptcy on a credit score and how to restore it to its previous level.
Impact of Bankruptcy on Credit Score
Many people considering Chapter 7 or Chapter 13 bankruptcy are worried about the effect that bankruptcy will have on their credit score. When trying to figure out how bankruptcy will effect this score, one thing to take into account is what the credit score was prior to the bankruptcy. The damage it will do to your credit score depends, in large part, on how good your credit was before you filed. If you are behind on payments to many accounts and your debt-to-asset ratio is high (meaning you have lots of debts and few assets), your credit is already in the tank. Bankruptcy will take a hit on your score but it was probably low to begin with. If, on the other hand, your credit is good before you file for bankruptcy, then your score will take a much bigger hit post-filing. Knowing exactly how much of a bounce your score will take is very individual but there are some things you can do to help it along post-bankruptcy.
After filing for bankruptcy start making all of your payments on time. In addition, keep your debt low and begin to prove that you can handle credit. One way to start improving your credit is to open a secured credit card account right after you are discharged from a bankruptcy. Simply head to a bank, fill out an application and make a deposit into a secured account. The bank, in turn, provides a credit card with a credit line that’s 50% to 100% of the deposit. Re-establishing credit after a bankruptcy requires some TLC but you can quickly prove that you can handle credit and raise your credit score step-by-step.