Let’s talk about bankruptcy.
Bankruptcy is an authorized process supervised by national bankruptcy courts. It’s intended to help individuals and businesses remove all or part of their debt and can also help them save a share of what they are in debt of. Most business or individuals that make this decision, understand that afterwards, they’ll have to recover from bankruptcy. Two main objectives of filing are:
- Fair payment of the legal claims of the creditors done by a reasonable distribution of debtor’s possessions
- To provide the insolvent a chance for a fresh start.
Types of Bankruptcy:
Voluntary bankruptcy: It can be brought upon itself by an insolvent debtor.
Involuntary bankruptcy: It can be forced by court order on the request of creditor’s petition.
Bankruptcy might help you become free of your debt, but it’s significant to understand that declaring bankruptcy has a serious, long-term effect on your credit.
Not to mention, it will persist on your credit report for a minimum 7 to 10 years, affecting your chances of opening new lines of financing or credit. When you are approved for new lines of credit, usually the interest rate will reflect the bankruptcy.
How it affects your credit
The chief matter that discourages most individuals from filing bankruptcy is the damaging effect it has on their credit. It’s 100% true that a bankruptcy can stay on your credit report for up to ten years and it hurts your credit score. Though, not filing for bankruptcy and letting your debts to go further into collections will also destructively impact your credit.
Liable on the kind of bankruptcy you file, Chapter 7 or Chapter 13 bankruptcy, your credit score will decline anywhere from 150 to 230 points. This is sufficient to take a good credit score down to a reasonable or deprived one. Meanwhile, most lenders choose whether or not to extend you credit based on your credit score. A bankruptcy will make it much harder initially in obtaining a home loan, auto loan or credit cards.
The main remedy for this is time; however, there are extra actions you can take to absolutely improve your credit report and score. Eventually, if you succeed to manage your new debts well, your score will progressively increase. And, in time you’ll be running your financial life effectively, even if the bankruptcy is still visible on your report.
How long will it take to recover from bankruptcy?
Most people are worried about Bankruptcy as they feel it will take 7 years or more to improve from the wounds done to one’s credit. The truth is it can take a number of years for credit to recover. If you are extremely diligent with rebuilding your credit, it could be significantly shorter.
Traditionally, people who file for bankruptcy need to sustain themselves without the use of credit cards or loans. For many, this is difficult and what got them to this point in the first place. The first types of offers you’ll qualify for are high interest, bad/no credit loans and cards. The interest rates on these offers make it very difficult to keep up with, and can lead right back to square one.
First, if you think that you are going to declare bankruptcy, there are few initial actions which will be very helpful.
Step-1:
If your credit cards are open and working, it’s suggested to pay one or more off and leave it/them out of Bankruptcy. If you own a car which is being funded then it would be best to keep it away from Bankruptcy. These things can be your positive trade lines in order to get out of Bankruptcy.
Step-2:
After you receive your discharge papers, you should follow a few more steps. You can get a secured credit card from a major bank. If they refuse then get one through First Premier or Capital One.
Why not just try to get a normal credit card?
Well, in short, you can’t for a while following bankruptcy. If you do by chance get an offer, the interest rate will be high enough to put you back in bankruptcy. To rebuild credit, sometimes you have to suffer the downsides of a secured card for a brief time.
Unhappily these cards have a high upfront fee such as $200. But the benefit they yield is rebuilding credit quickly. After this, consider enrolling into a credit repair program which will help get your score back up faster than alone.
When your credit score reaches around 700, the mainstream offers will start rolling in. Your goal must be moving from a secured card to a standard, unsecured credit card. By this point, you will have rebuilt using a secured credit card, so this new unsecured line of credit should have a significantly better interest rate.
After achieving the unsecured card, keep your consumption low. Make your payments on time every month. If you can’t follow these few rules for having unsecured debt, it’s best to avoid it altogether. One bankruptcy on your report is bad enough, and remember, you generally can’t file again for another 8 years.
Advantages and Disadvantages of Bankruptcy
Declaring bankruptcy can aid in relieving you of your legal responsibility to pay your debts. It also can help secure your home, car, business or skill to function monetarily, liable on what kind of Bankruptcy petition you file.
But, as we learned, it is a major detriment to your credit rating, making it more problematic to get a mortgage, loan or low-rate credit card, or buy a car, home, apartment or business.
If bankruptcy is your only option, be sure to use the methods discussed to rebuild your credit. Getting out of debt is one thing, staying out of debt is another.
