Have you wondered how bankruptcy affects credit? The fact is that when making the decision to file for bankruptcy, the impact on your credit score is an important factor. The bankruptcy outlook will likely continue to increase thanks to inflation and rising living costs. Is filing for bankruptcy worth the hit to your credit? Here is some information to consider.
Why Your Credit Score Matters
In the American economy, your credit score determines a lot of your success. At a basic level, your credit reflects how well you can be trusted to pay back a loan. Your credit score is generated by a combination of different factors, including:
- Payment history,
- Length of time with established credit,
- How much you use of your allotted debt
- Negative impacts like collections or missed or skipped payments
The details on your credit report make up what’s reflected in your overall score. Credit scores range from around 300 (very poor) to 850 (exceptional). Lenders look to these details to determine if you are a responsible borrower.
What Happens When You File?
When it comes to how bankruptcy affects credit, much of it has to do with restoring your relationship with creditors and potential lenders in the future. Since the decision to file for bankruptcy is often due to feeling overwhelmed or unable to repay incurred debt, you likely have a history of slow or missed payments and potential collections on your report. Just one late payment can damage your credit much faster than it takes to rebuild. Therefore, the benefits of bankruptcy often outweigh the disadvantages for many people.
How Bankruptcy Types Affect Your Credit
Different types of bankruptcy may often look more favorably to lenders in the future. For example, chapter 7 bankruptcy discharges you of your debts, but some of your property may be assessed to fulfill your obligations. Chapter 13 bankruptcy involves working with a court-appointed representative to come up with a payment plan to satisfy creditors. This type tends to impact your credit for less time than if you file for chapter 7.
Alternatives to Bankruptcy
There are some alternatives prior to filing for any kind of bankruptcy. You can try debt consolidation plans to make it easier to keep track of your payments. Other options include settling with creditors for a certain amount. However, this may not be enough if you are completely overwhelmed by your debt.
Long-Term Perspective
There are some important aspects of how bankruptcy affects credit. The main one is that it may often be difficult to get a mortgage or car loan for 5-7 years after the court discharges your debts. However, the relief from nagging creditors and the fresh start with no debt ultimately is a major benefit of bankruptcy. Since many people’s credit is poor due to outstanding debt to begin with, the advantages far outweigh the disadvantages in these cases.
The Law Offices of David Brunelle help people in Western MA and Northern CT with the legal process of filing for bankruptcy. Call (413) 539 – 5959 to learn more about how we can help you.