Many individuals find themselves in an unanticipated set of financial problems. Creditors begin to phone night and day and notices begin to come in from collection agencies. Many people begin to contemplate bankruptcy a viable option to ease the stress of these issues. Taking that step, on the other hand, can have a lasting effect on your credit score. The best thing to do is to consult with an attorney knowledgeable in bankruptcy to see what rights you have before you ever go ahead with filing.
With a bankruptcy, your credit score will go down. Even debts that are dismissed during the bankruptcy proceedings will not leave your credit report for some time. These items will linger on your credit score until you take the initiative to get them removed. The two different kinds of bankruptcy will have different effects on your credit score.
Bankruptcy Types: Understand the Variations
When you file Chapter 13 bankruptcy, your financial debts are not cleared. Commonly called reorganization, a Chapter 13 bankruptcy permits you and your creditors to develop a plan for paying off your debts in amounts and in a timeframe that is manageable for you. This type of bankruptcy aids those experiencing short-term financial issues due to extenuating life circumstances, such as a job loss or a serious illness. While filing for a Chapter 13 bankruptcy will hurt your credit score and can show up on your credit report for as long as 7 years, it also demonstrates your willingness to take care of your debts instead of having them discharged. Paying off your debt as a result of filing a Chapter 13 bankruptcy can help you obtain new credit after about a year.
The other alternative is a Chapter 7 bankruptcy. Chapter 7 will have a much bigger effect on your credit score and is therefore deemed a more serious bankruptcy. In a Chapter 7 filing, most of your debts are absolved. Debts that cannot be absolved consist of child support, alimony, and unpaid taxes. This kind of bankruptcy also remains on your credit for ten years. Nevertheless, you will be able to get a federal student loan following a Chapter 7 bankruptcy, it will be extremely difficult to get any other type of loan for no less than two years.
Improve Your Credit Score
After a bankruptcy, it is important to work on bringing your credit score back up. Immediately after the bankruptcy, it can be tough to get credit. However, two years after a Chapter 7, you may have difficulty getting a home loan. A year is the minimum amount of time after a Chapter 13 that you will be qualify for a mortgage. Getting a credit card will be very tough, and requirements for each lender will differ.
Following bankruptcy proceedings, it is imperative to once again begin to develop a credit history. This demonstrates to potential lenders that you have learned from your previous errors. Be sure to always pay all of your bills on time each and every month. Even one late payment can make lenders begin to think that you are experiencing financial problems still. Recognize that if you are given credit, you will have to pay a higher interest rate. Once your credit score recovers, you can begin to refinance these loans at much better rates.