The majority of people who put off filing bankruptcy do so because they worry about the negative repercussions bankruptcy will have on their credit. The irony of the situation is that most of these people already have bad credit, but continue to hold onto the hope that they can improve it without filing bankruptcy. In reality, had they already filed bankruptcy rather than putting it off for years, their credit would be on the way toward rehabilitation.
Not Filing Bankruptcy Could Be Worse
Instead of worrying about what filing bankruptcy will do to your credit, you should be worrying about what not filing bankruptcy will do. If you experienced a medical tragedy, a divorce, or lost your job, it is easy to squander away your savings on bills. Then, you start to fall behind on your bills, which impacts your credit score as each month passes by. If a creditor is attempting to repossess your car or foreclose on your home, your credit has already been negatively affected.
Although it may seem more dignified to hang in there and do your best with the financial situation you have been thrown into, bankruptcy might be the solution you really need to get back on track with a fresh financial start. While a bankruptcy filing is going to be reflected on your credit report for up to ten years, it could take that long - or longer - to pay off all of the creditors you owe right now. Even if your financial situation improves slowly over the next few years, there is a good chance you will still struggle to pay off all of your debt within ten years.
How Chapter 7 Will Affect Your Credit
As we mentioned, a Chapter 7 bankruptcy will remain on your credit reports for up to ten years. The good news is - if the court grants a discharge of all of your unsecured debt, your ratio of debt-to-income will improve drastically (because all of your debt was wiped away). Ultimately, this will start to improve your credit score after the court grants your bankruptcy discharge.
How Chapter 13 Will Affect Your Credit
Chapter 13 is a bit different than Chapter 7. A chapter 13 bankruptcy filing can remain on your credit reports for up to seven years. However, once you start making payments on your debts, your debt-to-income ratio will start to improve. At the end of your repayment plan, when the remainder of your unsecured debts is discharged, there will be a significant difference in your debt-to-income ratio. This helps to improve your credit score.
As long as you have made all of your Chapter 13 payments on time and in full throughout the duration of your case, your credit report will mark your accounts as “current,” which also helps with your credit. That is why it is crucial to work diligently with your attorney to come up with a repayment plan that you will be able to pay every single month for the next 36 to 60 months. If something unforeseen occurs, like the COVID-19 pandemic or a job loss, you should contact your attorney immediately so your payment plan can be adjusted accordingly.
Improving Your Credit After Bankruptcy
There are a few simple ways you can improve your credit after a bankruptcy:
Pay all your bills on time and in full. After your bankruptcy discharge has been granted, you need to be meticulous about paying your monthly bills on time. That way, all of the utility bills that you pay will report your accounts as current to your credit reports. This impacts your credit score positively and helps to improve your credit score over time. The better your financial habits after your bankruptcy, the better your credit score will be, despite the bankruptcy. Demonstrating financial responsibility after bankruptcy will also encourage lenders to work with you if you apply for a mortgage or a vehicle. Positive financial behavior will result in lower interest rates and better terms, even after a bankruptcy.
Obtain a low-limit unsecured or secured credit card. Once your bankruptcy is discharged, do not be surprised to find offers for credit cards in your mailbox from a variety of lenders. Our clients often ask, “What is the point of getting a secured credit card, if I have to pay for my charges in advance?” Secured credit cards require a deposit of $500 to $1000 from you, and then you can charge against that “credit.” That is not much different than putting $500 in your bank account and using your debit card to purchase groceries or pay bills with, right? Wrong. Your bank account will not report to the credit bureaus, so using it does not help improve your credit the way a secured credit card will. Be careful and compare all of the interest rates on the credit card offers you get, as many will come with extremely high-interest rates. Pick only one and pay your balance in full every month.
Buy a car. This might not seem like a good idea right after filing bankruptcy. In most cases, the loan rates you will be offered after your bankruptcy filing will be high, however, there are ways to circumvent a high-interest rate. For example, you can prepay a portion of your loan every month. Purchasing a vehicle and making that monthly payment every month is a great way to improve your credit.
Before using any of these tips, you need to sit down and create a structured budget after your bankruptcy is discharged. If you filed Chapter 13, you are most likely already accustomed to sticking to a monthly budget throughout the duration of your repayment plan. Keep these habits as you move forward and your credit will continue to improve over time. Your credit did not get bad overnight. It is not going to improve overnight, but you do have the power to get it back on track after a bankruptcy.
Are You Considering Filing For Bankruptcy?
If you feel bankruptcy is the best option for your financial situation you need to speak with an experienced bankruptcy lawyer as soon as possible. Please contact us online or call our office directly at 888.348.2616 to schedule your free consultation.