One of the primary reasons people give for choosing to postpone or avoid bankruptcy proceedings is concern about how bankruptcy will affect their credit score. While bankruptcy is a negative mark that stays on your credit report for some time, struggling with debt also damages your credit score.
Your credit report reflects when you make late payments, the fact that you have a staggering amount of debt and any judgments that a creditor secures against you. It is possible to use bankruptcy as a means of rebuilding your credit and rebooting your financial life.
Whether you qualify for Chapter 7 bankruptcy or need to file Chapter 13 bankruptcy, you can develop excellent credit habits during and after bankruptcy that will help put you on a path toward better credit in the future.
Credit after Chapter 7 bankruptcy
When you file Chapter 7 bankruptcy, it means that you passed the North Carolina means test and can receive a discharge of your unsecured debts, like credit card debt and medical debt. However, the downside to Chapter 7 bankruptcy is that it stays on your credit report for a full 10 years after the date of your discharge. That means that lenders will know about your bankruptcy for a decade.
Credit after Chapter 13 bankruptcy
Chapter 13 Bankruptcy involves restructuring your debts and entering into a specified repayment period, usually three or five years. During that time, you must make monthly payments to the court.
However, at the end of your payments, the courts will discharge the remaining unsecured debt that you carry. Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy only stays on your credit report for seven years, just like any other blemish. That means that you can bounce back a little bit more quickly. However, that reporting time starts when you secure your discharge.
Rebuilding credit involves getting new lines of credit
You will find that credit card companies will send you offers within the first few months after your discharge. Typically, these offers have an annual fee and a high interest rate. After all, the lenders need to take a bit of a risk. However, that risk is limited by the fact that you can't file for bankruptcy protections again in the immediate future.
Therefore, to credit card lenders, someone with a fresh bankruptcy is an appealing customer. When you take out a new credit card, you should use it for one thing and one thing only, whether it is to pay your cellphone bill each month or to put gas in your car. That money should be part of your monthly budget, and you must pay the card off in full every month.
Doing so for several months will likely result in an increase to your line of credit. It will also make it easier for you to apply for a new credit card in the future with better terms for you as a borrower. Establishing several different lines of credit can help you diversify your credit report. The sooner you initiate those new lines of credit, the longer you will have to develop a positive payment history on them.