People pursue bankruptcy because their debt has become an insurmountable challenge or key resources are vulnerable. A personal bankruptcy filing can take anywhere from a few months to five years or longer to complete.
Bankruptcy typically provides immediate relief from financial hardship related to collection activity. However, it may also have an immediate impact on the creditworthiness of the filer. What credit consequences generally accompany a bankruptcy filing?
Automatic stays freeze revolving lines of credit
Some people pursuing bankruptcy relief may only want to discharge certain debts. They might hope to retain certain revolving lines of credit to ensure their financial flexibility during and after bankruptcy. Unfortunately, when the courts send out notice about an automatic stay related to a pending bankruptcy case, most lenders automatically freeze available lines of credit.
Even if the filer did not include their personal loan with their bank or their most-used credit card among the debts that they intend to discharge, the financial institutions granting them credit are likely to immediately cease doing so. Lenders tend to view those going through bankruptcy as ineligible for credit until the resolution of their case.
Rebuilding can start immediately
As soon as the bankruptcy process is complete, individuals can start rebuilding their creditworthiness. Credit scores tend to drop by as much as 200 points when people file. However, they can begin improving their credit scores after they complete the bankruptcy process.
Despite having a low credit score and a recent bankruptcy on their record, many filers start receiving credit offers within a few weeks of completing bankruptcy. They can obtain secured lines of credit that require deposits or the use of personal property as collateral.
As they make timely payments on those lines of credit, their credit scores slowly improve. Within a year or two of regular payments, most filers are eligible for bigger and better credit opportunities. They may be able to secure mortgages and car loans.
Eventually, the record of the bankruptcy comes off of the credit report of the filer. 10 years after the discharge in a Chapter 7 case or seven years after discharge in a Chapter 13 case, the credit bureaus should stop reporting the bankruptcy case. Bankruptcy does immediately diminish creditworthiness, but it may increase it in the long run.
People who previously struggled with debt may have few issues remaining in control of their finances after a personal bankruptcy. Learning more about how to rebuild credit after a bankruptcy case can help people understand just how beneficial bankruptcy can be.
