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One solution to dealing with an enormous debt that you’re unable to pay off is to file bankruptcy. Of course, filing bankruptcy isn’t always the optimal solution, because it can adversely affect your credit. In fact, filing for bankruptcy is most assuredly one of the worst things you can do to your credit. However, it won’t ruin your credit forever. And thankfully, rebuilding credit after bankruptcy is not an impossible task.
It might take many years before your credit returns to a favorable state. You will have to work hard to rebuild your credit back to a good score. But you don’t have to attempt rebuilding your credit on your own, either. There are credit repair services you can use if you need to. Whether you do it on your own or with help, rebuilding your credit is very much to your advantage. That’s because rebuilding credit after bankruptcy is very important. And once you understand how badly it affects your credit, you’ll quickly see just how important it is.
Individuals dealing with debt typically file one of two types of bankruptcy — Chapter 7 or Chapter 13. Regardless of which one you file, they will both affect your credit score and your credit report very badly.
A large part of what factors into your credit score is your payment history. Pay all your bills and creditors on time, and your credit score steadily rises. But if a late payment is reported even just once, it can bring your credit score down. Filing bankruptcy tells the credit reporting bureaus you cannot pay your debts on time or in full.
This not only affects your credit score, but you will also find the notification on your credit report. A Chapter 7 bankruptcy appears on your credit report for 10 years. A Chapter 13 bankruptcy notification stays on your credit report for seven years.
Lenders, utility companies, and other institutions often perform credit checks when you are seeking a loan or services. They will be alerted to the bankruptcy, which will be a red flag. The notification (as well as your low credit score) will factor into their decision. A lender may decide not to grant you a loan. It will also be difficult to get some services or even apply for a new credit card.
Rebuilding credit after bankruptcy is important for many reasons. Some of these include:
As mentioned above, utility companies will check your credit. A low credit score won’t necessarily stop them from providing you with service. But you will have to pay a high security deposit. When your credit score rises, you can get your deposit back.
The better your credit, the higher your allowable credit limit. However, a low credit score could cause your limit to be decreased.
If your credit score is suffering badly, creditors might not issue you any new credit cards. This can make it hard to do many things that require a credit card. Renting a car, for example, or even using a rideshare service like Uber or Lyft.
When you first file for bankruptcy, you probably aren’t planning on getting a new car or a new home. But you might want to several years down the road. The bankruptcy will still be on your credit report. But if you’ve worked hard on rebuilding credit after bankruptcy, you’ll improve your chances of getting a loan.
If you receive a credit card or a loan, you will have to pay higher interest rates. Loan rates are typically two to three points higher than the current conventional rates.
As you can see, a low credit score can impact several areas of your life. That’s why you should take steps to rebuild your credit after a bankruptcy as soon as possible.
Now for some good news. Rebuilding credit after bankruptcy won’t take several years. In fact, most experts say that you can improve your credit score significantly within 18 to 24 months. However, to get a score higher than 700 again, you’ll need to work on your credit for about 4–5 years. The reason is that the bankruptcy initially causes a drop of 150–250 points.
The average credit score after a bankruptcy is 530 (or lower, if your score was already low to begin with). Making payments on time and doing other things to improve your credit can raise it again after a few months. But the bankruptcy itself will still prevent you from going much higher than 640. This is a “fair” score.
To get above 700 again, you’ll need to wait for removal of the bankruptcy.
Most of the process of rebuilding credit after bankruptcy falls on you. But there are services you can turn to for additional assistance. Credit repair companies can often help improve your credit score. But you’ll have to pay them a fee, and they might not deliver the results you’d expect. How much it will cost will vary from company to company.
Credit repair companies examine your credit reports for any mistakes or outdated information. Getting the information corrected can often improve your credit score. But there is no guarantee. And you should also be aware that reputable credit repair companies can’t require payment unless they deliver positive results.
Experts suggest seeking the advice of a credit counseling agency first. These resources are usually free. A counselor will review your finances and offer assistance in teaching you how to improve your financial situation.
There’s already plenty of expert advice to read about rebuilding your credit on the Internet. If you follow the advice, there is no need to pay for a credit repair company. There are even credit cards that help rebuild your credit score. In time, your financial situation will hopefully improve. Eventually, the bankruptcy will be discharged and you can attempt to return to a more secure financial future.