Personal bankruptcy can give you a fresh start on your finances, but it comes with some costs. One of these costs is damage to your credit score. A low credit score can limit your ability to borrow money once you have completed the bankruptcy process, and that can hold you back from your plans as you rebuild your life.
That said, when you are considering filing for bankruptcy, your credit rating may not be at the top of the list of your concerns. And you can repair your damaged credit rating.
What is a credit rating?
When lenders are deciding whether to extend credit to a person (such as they do with a home mortgage) they look to credit agencies to provide them with a report on the person’s credit history. This is commonly expressed as a FICO score, which is the result of a system developed by the Fair Isaac Corporation (known as FICO). To develop a FICO score, credit agencies measure five factors about a person’s financial health:
- Current debt
- Types of credit
- Any new credit accounts
- Payment history
- Duration of credit history
After reviewing these factors, credit agencies give the individual a score between 300 and 850. Generally speaking, lenders consider a score of 670 or higher to be a sign of a healthy credit history, and they will be more likely to lend credit to people with these scores and to give them credit at decent interest rates. By contrast, lenders are cautious of individuals who have scores lower than 670.
How bankruptcy affects your credit report
When making a report on a consumer’s credit, the credit agencies make a note of any bankruptcy filings in the person’s history. Exactly how far back into the person’s history may depend on the type of bankruptcy involved.
If you went through Chapter 7 bankruptcy, it will stay on your credit report for 10 years. If you went through Chapter 13 bankruptcy, it will stay on your credit report for seven years. However, you should note that Chapter 13 bankruptcy can take up to five years to complete.
The In some cases, lenders won’t even consider extending credit to a person who has a bankruptcy on their credit report. In other cases, lenders will do so only at a higher interest rate.
Rebuilding your credit
It isn’t easy to rebuild your credit score when you still have a bankruptcy on your credit report, but it can be done. Since one of the factors making up your FICO score is your payment history, it’s important to pay your bills regularly and on time whenever possible.
You may also look into other ways of improving your credit history. One way is through getting a secured credit card. This involves putting a cash deposit down in order to open a credit account. Similarly, if you have any secured debts left over from the bankruptcy process (such as a car or home loan) and you think you can pay off, you might consider a reaffirmation agreement.
You can rebuild your financial life after bankruptcy, but it takes time and care. It’s wise to talk to experienced professionals about your long-term goals for your financial future.