3 Questions About How Bankruptcy Impacts Your Credit ScoreShare
Are you considering bankruptcy to give yourself a financial fresh start, but worried about the impact on your credit score? You'll definitely have the following questions before you move forward.
Why Does Your Credit Score Matter After A Bankruptcy?
That three-digit number that makes up your credit score plays a big part in your ability to borrow money in the future. If you are filing for bankruptcy then it is likely you do not have the cash on hand to make a major purchase. A good credit score is necessary for major purchases, such as a home or a car, and also for qualifying for credit cards. You can be surprised by how much your credit score can impact your financial future.
Do The Different Forms Of Bankruptcy Impact Your Credit Score Differently?
The two main types of bankruptcy you'll have to pick from are Chapter 7 and Chapter 13, with each one having its own pros and cons. Chapter 7 bankruptcy essentially liquidates your assets to pay off your debts, and the result is that many debts are discharged completely. Chapter 13 has a repayment plan where a portion of your debts is paid off, but does not liquidate eligible assets.
Since Chapter 13 does involve paying back some of the debts you owe, you will not see as big of an impact on your credit score. It will be a huge blemish that will take time to go away, but it is the better of the two options because of that repayment plan. Chapter 7 shows up on your credit report for a longer period of time, and is viewed as being much worse because debts were completely discharged.
How Do You Repair Your Credit After A Bankruptcy?
Using bankruptcy may have a negative impact on your credit score, but it is still a better option than to be drowning in debt. Thankfully, there is a way to recover after bankruptcy, or else people would not use bankruptcy at all.
You should start by creating a very strict budget so that you do not go into debt again. This involves looking at your monthly income, subtracting your set expenses each month for things like housing and utilities, and balancing the money that is left for everything. It can be difficult creating and sticking to a budget, but it will be well worth it.
You'll also need to rebuild your credit, and the best way to do that is with a secured credit card. You will use cash as collateral to create your credit limit, which is the maximum amount you can borrow. You should then use your credit card and pay it off in full regularly to demonstrate you are responsible with borrowing money.
Contact a local bankruptcy lawyer to learn more.