If you are struggling to pay overwhelming debts, bankruptcy can provide significant financial relief. You have the option to file Chapter 7 or Chapter 13 bankruptcy, depending on your situation and your needs. Both of these forms of bankruptcy can help settle medical debt, credit card bills and many other types of unsecured debts.
There is one catch to bankruptcy, however: Your credit score can be affected immediately after filing for bankruptcy. As a result, you may face limitations when applying for new credit or loans. You can learn more about how bankruptcy can affect your credit score and what you can do to mitigate the situation. Here is what you should know:
A bankruptcy’s effect on your credit is not permanent
When you file for bankruptcy, your credit score can drop more than 200 points depending on where your credit is already at. When people do a credit check on you, they may see that you filed for bankruptcy. A bankruptcy filing can stay on your credit report for several years, depending on which kind of bankruptcy you filed:
- Chapter 7 bankruptcy can show on your report for 10 years, but can provide immediate relief from debts.
- Chapter 13 bankruptcy can show on a report for 7 years but can allow you to make regular payments on your debt over 5 years and retain assets that you might otherwise have to surrender.
A bankruptcy filing will disappear from your credit report once it expires — but your credit can recover long before that happens if you manage your post-bankruptcy finances carefully.
Taking careful steps to rebuild credit
Even though a bankruptcy filing can stay on your credit report for many years, you can immediately start rebuilding your credit. There are a few strategies that can help you build your credit score back up, including:
- Seting a budget: Knowing how you spend your money and the amount you spend on expenses and debts can help you plan your spending strategy. Using your money wisely can help prevent new debts.
- Making regular payments: Whenever you receive a bill, it is important to make payments early. Keeping up with regular payments can build credit in small increments.
- Using a secured credit card: Secured credit cards can allow you to make positive purchases and payments, improving your credit score.
- Becoming an authorized user on a credit card: Having a family member or friend make you an authorized user on a credit card can help you build your credit and credit score.
You may need to reach out for legal guidance to learn about your bankruptcy options.
