Facing overwhelming debt can be a daunting experience, and for many individuals, bankruptcy emerges as a viable solution. While bankruptcy provides a fresh start financially, it’s essential to understand the implications it has on your credit. In this blog, we’ll explore the relationship between bankruptcy and credit, and how an Iowa bankruptcy attorney can help you consider your options.
Any Type of Bankruptcy Can Impact Your Credit
Bankruptcy is a legal process that allows individuals or businesses to eliminate or repay their debts under the protection of the bankruptcy court. The two most common types of consumer bankruptcies are Chapter 7 and Chapter 13. Regardless of the type, filing for bankruptcy is a significant financial event that leaves a mark on your credit history.
Chapter 7 Bankruptcy:
- In Chapter 7, your non-exempt assets may be liquidated to pay off creditors, and the remaining eligible debts are discharged. This process typically takes a few months.
- A Chapter 7 bankruptcy remains on your credit report for ten years from the filing date.
Chapter 13 Bankruptcy:
- In Chapter 13, you create a repayment plan to settle your debts over three to five years. Once the plan is completed, eligible remaining debts are discharged.
- Chapter 13 bankruptcy remains on your credit report for seven years from the filing date.
Immediate Impact on Credit Score:
The moment you file for bankruptcy, your credit score will likely experience a significant drop. The exact impact varies from person to person, but it’s not uncommon for a credit score to decrease by several hundred points. This decline reflects the perceived risk lenders associate with a bankruptcy filing.
Long-Term Impact:
While bankruptcy does have a lasting impact on your credit, its significance diminishes over time. As the years pass, the negative impact gradually lessens, especially if you actively work towards rebuilding your credit. Lenders understand that individuals may face financial hardships, and they may be willing to extend credit as your financial situation stabilizes.
Rebuilding Credit After Bankruptcy:
While the initial blow to your credit score is substantial, the long-term effects depend on your actions post-bankruptcy. Contrary to common misconceptions, it is possible to rebuild your credit over time.
Secured Credit Cards:
- Obtaining a secured credit card is a practical step towards rebuilding credit. These cards require a cash deposit as collateral, and your responsible use and timely payments can positively impact your credit score.
Timely Payments:
- One of the most crucial factors in rebuilding credit is consistently making timely payments on any remaining debts and new credit obligations. This demonstrates financial responsibility and improves your creditworthiness.
Credit Counseling:
- Consider seeking guidance from a credit counseling agency. They can help you manage your finances and provide valuable advice on rebuilding credit.
Monitor Your Credit Report:
- Regularly check your credit report for accuracy. Dispute any inaccuracies and keep a vigilant eye on your financial standing.
Consider Your Options with the help of an Iowa Bankruptcy Attorney
Understanding how bankruptcy will impact your credit is crucial for anyone considering or going through the bankruptcy process. While the initial impact on your credit score is substantial, it’s not the end of your financial story.
With responsible financial practices and a commitment to rebuilding credit, you can emerge from bankruptcy with a renewed financial outlook and the potential for a healthier credit profile in the future. If you’re considering bankruptcy, consult with an Iowa bankruptcy attorney for help navigating the process.
Shane Zisman has years of experience helping individuals considering bankruptcy. Zisman Law can help you get past the financial obstacles, get debt relief, and take your life back. Get in touch today at 641-472-5141 to schedule a free phone consultation.