To the average American, filing for bankruptcy may seem like a scorched-earth tactic for handling their debts. People might even compare it to a nuclear attack on their finances, leaving nothing behind. While it is true that bankruptcy has a profound impact on your credit in the short term, that doesn’t mean that it must have a permanent, negative effect on your life and finances.
In fact, bankruptcy can be the start of better financial decisions and increased physical responsibility. Looking at bankruptcy not as the end of your creditworthiness but as an opportunity to improve your credit over time is one way to make the best of a stressful situation.
Bankruptcy frees up your income for the bills that matter
Filing for bankruptcy means an automatic stay on collection efforts by the companies and people to whom you owe money. When you file for bankruptcy, you can temporarily halt foreclosure, prevent the repossession of a vehicle and get a pending creditor lawsuit seeking the garnishment of your wages dismissed.
Then, after the court reviews your petition, if they grant you a bankruptcy discharge, your unsecured debts become an issue of the past. You no longer have an obligation to repay them, and they no longer impact your credit score. Instead, there is only one negative mark from the bankruptcy courts themselves. Instead of many delinquent marks and late payments, there is only one defect impacting your credit score.
Without those credit cards or medical bills to worry about every month, you will have more money to spend on the bills that matter the most, such as your mortgage and car payment. You may even have a little bit extra to set aside for your retirement fund or an emergency fund.
The worst credit consequences of bankruptcy are short-lived
While it is true that bankruptcy will have an immediate, negative impact on your credit score, the amount of impact decreases the more time passes after your discharge. In the months after you file for bankruptcy, you will likely struggle to secure any new lines of credit. However, shortly after your discharge, companies will likely begin courting you for credit cards.
Within a year or so, you may be able to qualify for vehicle financing, while a standard mortgage could be possible as soon as two years after the bankruptcy, provided that you take active steps to improve your credit and keep on top of your financial circumstances.
In Chapter 7 cases, the bankruptcy will continue to impact your credit score slightly less each year for 10 years, while in Chapter 13 proceedings, the reporting period ends after seven years. That gives you plenty of time to rebuild your finances, as well as a clean slate once the public record of your bankruptcy falls off your credit report.