If you choose to file for bankruptcy, it will affect your credit — but not for the rest of your life. Remember, bankruptcy was created as a second chance for the hardworking people who happened to face hardships along the road of life.
The word bankruptcy is often associated with negative ideas like irresponsibility, financial distress, and loss of property or possessions. However, people who have gone through the process might offer different associations like relief, financial security, and a new beginning. Filing for bankruptcy isn't a decision to be taken lightly, but it provides relief from overwhelming debt.
If you've been struggling with debt, you've probably heard all of the problems bankruptcy can cause. Many of these ideas are myths. In fact, these ideas are often used as scare tactics by debt collectors to force debtors to agree to unreasonable monthly payments which force the debt spiral to continue. Bankruptcy does have a big impact on your credit score, but it can be a necessary path back to financial security.
Common Myths About Bankruptcy
There are many myths and misunderstandings surrounding the bankruptcy process. These are some of the most common:
- False: Everything related to your bankruptcy remains on your credit report for 10 years.
The truth: Bankruptcy information remains on your credit report for 7 to 10 years, but you can work to rebuild your credit during that time. In fact, we recently had a client receive a chapter 13 discharge and he had already raised his credit score to 700+.
- False: You will never be able to get a loan or credit card in the future.
The truth: Credit cards are a good way to start rebuilding your credit when used carefully. You can get a secured credit card anytime.
- False: Bankruptcy affects all credit reports the same way whether you discharge $10,000 or $1 million.
The truth: The amount of debt discharged through bankruptcy is one of many factors that determines the changes in your credit score.
- False: Bankruptcy will permanently affect your credit.
The truth: Rebuilding your credit is an important part of the bankruptcy process.
- False: You must give up your home and all possessions.
The truth: Chapter 13 bankruptcy is used to prevent these losses. In Chapter 7, you can keep your home.
- False: You can't begin to rebuild your credit until after the bankruptcy information is removed from your credit report. The truth: Rebuilding your credit early can help offset negative information in your credit report. (Get a free copy of our book Life After Bankruptcy here for more information on this topic.)
- False: People who file for bankruptcy are irresponsible or lazy.
The truth: Bankruptcy is often the result of a medical emergency, an unexpected loss of employment, or divorce.
The Truth About Bankruptcy and Your Credit Score
If you choose to file for bankruptcy, it will affect your credit. However, it won't impact your score for the rest of your life. It's important to remember that bankruptcy was never designed to be a punishment for people who couldn't pay off debt. It was created as a second chance for the hardworking people who happened to face hardships along the road of life.
Most of the people who come to us for help haven't maxed out their credit cards because they wanted extravagant new possessions. Instead, their lives were interrupted by a medical emergency or a company that dissolved. Bankruptcy is a second chance that involves short-term sacrifices and hard work. However, it can offer you the long-term financial success you deserve.
[Bankruptcy will impact your credit score, but there are steps you can take to rebuild. Watch the video above to see how.]
How Bankruptcy Affects Your Credit
There is no doubt that filing for bankruptcy will lower your credit score. It will be a big drop too... at least for the short term. A good score (over 700) can drop as much as 200 points or even more. A medium score (around 680) may drop around 150 points. It's impossible to calculate exactly how much your score will drop without taking all of the factors of your current credit score into account.
While it's true that bankruptcy will remain on your credit report for 7 to 10 years, your credit score won't be dismal the entire time. Practicing good credit habits, like getting a secured credit card and making payments on time, can help you rebuild your credit even while the bankruptcy report still exists. With careful planning and hard work, it's possible for some people to reach the "good credit" level within 2 to 5 years after filing bankruptcy.
How To Rebuild Your Credit After Bankruptcy
Rebuilding your credit after bankruptcy is possible. In fact, it's an important part of the bankruptcy process. The purpose of bankruptcy is not simply to discharge your debt. The ultimate purpose is to rebuild good credit and achieve financial security.
[Filing for bankruptcy will impact your credit score, but not for the rest of your life. Start rebuilding your credit now with our free Life After Bankruptcy guide.]
Step 1. Pay Off Existing Debt.
If bankruptcy didn't completely eliminate your debts, now is the time to pay them off. Pay off debts with the highest interest rates first. Aggressively pay off these debts by curbing spending. Avoid impulse buys, cut unnecessary living expenses, and consider a side job to earn extra income.
Step 2. Work to Build Your Credit Score.
Adding new credit (the right way!) is one of the best ways to rebuild your credit. Secured credit cards and small installment loans can offset negative information on your credit report. Responsible payment habits and keeping credit balances low will also help build positive credit.
[To reestablish your credit, you need credit sources to report to credit bureaus so you can create some credit history. Your rent payment could be one of these credit sources. Watch and learn how here.]
Step 3. Avoid New Debts.
Emergencies are impossible to avoid. However, you can work to become more prepared. Invest in quality health insurance to avoid unanticipated medical expenses. Create a budget and add some money to a savings account each month. Avoid spending debts by focusing on necessities, saving for large purchases, and limiting credit card use.
Step 4. Increase Your Income.
Make an effort to increase your income with a change of employment or working toward a raise at your current job. Consider seeking higher education to advance your workplace value.
Woodall & Woodall Is Here To Help
If you live in South Georgia and are considering bankruptcy, the expert attorneys here at Woodall & Woodall are here to help. We understand what it feels like to be drowning in debt, and we have the experience to help you beat the seemingly endless struggle. There is a way out. Not only can you eliminate your debt, but our Life After Bankruptcy program can help you get back your financial footing.
If your debts are taking over your life, don't face the struggle alone. Contact us today for a free consultation or give us a call at 229-247-1211. Get on the road to financial recovery and find your new beginning.