Today, bankruptcy has a reputation that it doesn’t deserve. While many people think of it as the result of serious financial missteps, it should be viewed from a more positive angle. In 2019, 752,160 people used bankruptcy as a chance to rebuild their financial lives. While this number might seem high, many economists say that only a fraction of people who need bankruptcy file for it. Fear, a lack of information, and an overly optimistic outlook influence many people who desperately need bankruptcy to file for it.
Instead of being looked at as a failure, bankruptcy should be looked at as the first step people take to rebuild their financial health responsibly. However, bankruptcy is a process and, if a person wants it to be successful for them, they have to do what it takes to make the process worth their time and effort. Part of this effort involves being rebuilding the credit their bankruptcy may have impacted.
Does Bankruptcy Harm Credit Scores?
According to research, most damage is done to a person’s credit happens in the months before they apply for bankruptcy. Researchers from the Federal Reserve Bank of Philadelphia found that credit scores drastically decreased 18 months before people filed for bankruptcy and then increased after they filed.
In other words, if someone is worried about their credit score but needs to file for bankruptcy, their concerns are misplaced.
The researchers mentioned above found the following:
- Those who file for Chapter 7 bankruptcy had an average credit score of 538.2. By the time a person’s debt was discharged, they had an average score of 620.3.
- Those who filed for Chapter 13 bankruptcy started their process with a credit score of 535.2. By the time they had completed the process, Chapter 13 filers had a credit score of 610.8.
A credit score of 600 or less is considered to be an unfavorable number. The information above reveals that most people who file for either type of bankruptcy emerge from it in better financial condition than they were before.
How Long Does Bankruptcy Impact a Person’s Credit?
Bankruptcy can impact a person’s credit score for 7 to 10 years after the date that debt is discharged from the process. Interestingly, how much bankruptcy impacts credit depends on how high a person’s score is before they file for it. Those with high credit scores will see their credit score impacted more than those who have lower scores.
The good news is, despite lowering credit scores, bankruptcy provides people with the chance to rebuild their credit scores with their newly obtained financial freedom from debt. After bankruptcy, a person should focus on rebuilding their credit. If the right steps are followed, a person can significantly rebuild their credit in 12 months!
Ways to Rebuild Credit After Bankruptcy
While bankruptcy can help someone recover, the research above reveals that people still aren’t in the position they’d likely prefer to be in after bankruptcy. This is okay—bankruptcy is a process and emerging from it is the first step to rebuilding credit and financial health! There are multiple ways to rebuild credit after a bankruptcy.
Low credit scores mean:
- A person might have lower credit limits on cards
- A person will have to secure loans with higher interest rates
- An increased likelihood that advertised terms for a loan won’t be attainable
Budget Your Expenses
While budgeting won’t make an immediate impact on your credit score, it’ll help prevent the situation that caused it to get so low in the first place. Knowing your monthly expenses and how much money you can spend after paying them will help you avoid falling into debt once again.
Get a Secured Credit Card
Unlike typical unsecured credit cards, secured credit cards are backed by the money you have. Secured credit cards with a $1,000 credit limit require the people who hold them to deposit $1,000 with their creditors. It can take up to a year after filing for bankruptcy to get a company to agree to issue a new credit card after bankruptcy, even for secured credit cards.
After getting any type of credit card, it’s crucial that payments are made on time and that a person doesn’t carry a balance of more than 30 percent of their available credit.
No Credit Card? Become an Authorized User
Some credit cards allow users to make another person an authorized user. If you know someone that trusts you enough to allow this, you can be added to their card. If the holder of the card you’re an authorized user of pays their bill on time, you’ll enjoy the benefits of those on-time payments! However, keep in mind that any missed payments from the cardholder can harm your credit score.
Rebuild Credit with a Loan
After slowly rebuilding your credit, you might be able to secure a loan for something like a car. Manageable short-term car loans are great for rebuilding credit because they enable a person to show they can manage credit card debt and a loan—something that helps build credit faster.
If you need help discovering what financial options are available to you, call Miller Law Group, P.C. today for help. Our Massachusetts bankruptcy lawyers are standing by to provide a free consultation