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How Will Filing Bankruptcy Affect My Credit?

My clients are always very concerned about how filing for bankruptcy is going to affect their credit. While it is true that bankruptcy will negatively impact your credit, and that it can appear on your credit report for up to ten years, chances are if you are filing for bankruptcy relief your credit was not all that great to begin with. Late or missed payments, high credit card balances, and a high debt to income ratio all work to destroy your credit score.

Instead of dwelling on the negative consequences of filing for bankruptcy, try to focus on the benefits. Yes, there are benefits to filing a bankruptcy. For starters, receiving a bankruptcy discharge can actually improve your credit over time. A bankruptcy discharge wipes out your debt, thereby extinguishing your liability. Eliminating most, if not all, of your debt improves your debt to income ratio. Additionally, it prevents creditors from reporting delinquency to the credit bureaus.

So what can you do to make the most of your fresh start and rebuild your credit?

Check your credit report.
A few months after your bankruptcy is closed, you should pull a credit report to make sure your debts are being reported as discharged. You can obtain a free credit report from all three credit bureaus once per year at www.annualcreditreport.com. Make sure that the debts included in your bankruptcy are listed as “discharged in bankruptcy.” Review the report for errors that will negatively affect your score, and make sure to file disputes regarding any inaccuracies you discover.

Get a secured credit card.
A secured credit card is like a credit card with training wheels. You pay a deposit to the credit card company and that amount is your credit limit. Use the card for small purchases and pay in full and on-time every month. Consistently making payments on the card will have a positive impact on your credit score.

Pay loans on time.
If you have any installment loans that were not discharged in bankruptcy, such as student loans or a car loan, be sure to make the payments on time and in full.

Change your habits.
Examine what behaviors caused you to need to file bankruptcy in the first place. Evaluate your financial decisions honestly and make the changes you need to secure a better financial future.

As you build good credit history in the two years following bankruptcy, you will start to qualify for more favorable loans, unsecured credit cards with better interest rates, and your credit score will be on its way up. It takes 7 to 10 years for a bankruptcy to fall off your credit report, but diligent, responsible credit habits can result in an increased credit score within months.

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