While filing for bankruptcy can have a negative impact on your credit score at first, proper planning and guidance can make bankruptcy an important first step in improving your credit over the long term.
How Chapter 7 affects your credit score
Chapter 7 is one of the most common types of bankruptcy. Qualified individuals often choose this route because it is a quick and efficient way to wipe away any unsecured debt. In a Chapter 7, you get to keep your exempt assets and you can receive a discharge of your unsecured debt such as credit cards, medical bills, old utilities, debt from repossessed cars and even income tax debt if it is old enough.
While this method of eliminating debts can have many benefits, it can have a short-term negative impact on your credit score. However, just because you have a bankruptcy on your credit report, doesn’t mean that you cannot improve your credit score within the months and years after filing.
Rebuilding credit after bankruptcy
Though the presence of a bankruptcy on your credit report will definitely affect your ability to open new lines of credit at reasonable interest rates, there are ways to rebuild your credit score after bankruptcy, including:
- Paying car loans, insurance, and utility bills on time
- Maintaining a low debt-to-credit ratio
- And obtaining new lines of credit such as a new credit card. Yes. Believe or not, credit card companies will send you new cards in the months and years after your bankruptcy is over. Make sure you pay the monthly bill on time!
While the immediate impact of a bankruptcy can be negative, eliminating your debt is the first step on your financial journey. Declaring bankruptcy not only solves the immediate problem of creditor harassment, but it can also wipe the slate clean for you to start effectively rebuilding your credit.
By forming and practicing good financial habits and working with knowledgeable experts, filing for bankruptcy might be exactly what you need to start rebuilding your credit rating in the long run.