If you’ve found yourself with more debt than you can handle, you may be considering bankruptcy. From the different types to how interest rates are impacted, here’s how a bankruptcy affects your credit.
Types of Bankruptcies
There are two basic kinds of personal bankruptcies: Chapter 7 and Chapter 13.
A Chapter 7 bankruptcy is essentially the liquidation of all of your assets. Once you go through Chapter 7 — it typically takes about three months to receive a discharge — any unsecured debts are eliminated, and you’re no longer responsible for paying them.
You have to qualify financially for this type of bankruptcy, says Chris McConville, president of credit education at CureMyScore.com and a credit expert witness in both federal and state courts.
“If you have $50,000 in credit card [debt] and you want to get rid of it, the courts want to make sure you don’t have $100,000 in the bank and that you’re not making $200,000 a year,” McConville explains. “They want to be sure you don’t have the ability to pay your debts.”
A Chapter 7 bankruptcy will generally remain on your credit report for up to 10 years from the date filed.
If you file for a Chapter 13 bankruptcy, it will involve a repayment plan for some of your debt. Not all debt is discharged in this type of bankruptcy, and you must meet a different set of qualifications to be eligible to file.
Unlike a Chapter 7 bankruptcy, a Chapter 13 will typically stay on your credit report for only seven years from the filing date.
Bankruptcy and Your Credit Score
The impact a bankruptcy has on your credit score will depend, in part, on what your score was before the bankruptcy. The higher your credit score prior to the bankruptcy, the more it could be affected by the process.
For example, if you boasted a credit score of 780 before your bankruptcy, your score could fall more than 200 points. On the other hand, if you started with a 680, your score could fall about 100 points.
After filing for bankruptcy, you may also have difficulty getting approved for new credit, since lenders use your credit score to assess your risk as a borrower. If you’re offered credit shortly after a bankruptcy, you’ll likely be charged a high interest rate.
Improving Your Credit Score After a Bankruptcy
Following a bankruptcy, if you are unable to qualify for an unsecured credit card — a traditional credit card that doesn’t require a security deposit — consider opening a secured credit card. If you pay your balance on time and in full each month, you may be able to convert to a regular credit card within a short period of time.
In general, the most important thing you can do to after filing for bankruptcy is to pay your bills on time — and ensure none of your accounts are sent into collection.
Be mindful of debt, and spend only what you can afford. And remember: Patience, discipline and timely debt payments are key.
