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Many people erroneously believe that bankruptcy serves as a financial Scarlet Letter that will define you for the rest of your life. That’s not the case. As a follow up to our blog post “6 Most Frequently Asked Credit Report Questions and Answers”, we are going to take a closer look at the effects that bankruptcy can have on your credit score.
Whether you have a high or low credit score, bankruptcy will decrease your rating. Here are the scoring ranges:
Filing for bankruptcy can cause very good and good scores to drop between 130- 200 points. It’s important to note that you can rebuild your credit over time, but not repaying your debts will damage your credit score even more.
This isn’t as bad as it sounds, and it depends on which chapter of bankruptcy you file.
Chapter 7 bankruptcy–designed to liquidate, or sell off, your non-exempt assets or valuable property–will stay on your credit report for 10 years. Because you make no repayments, Chapter 7 is a bigger stain on your credit report. However, as we’ve previously written, it shouldn’t preclude you from establishing new lines of credit and rebuilding your finances.
Chapter 13–designed to discharge some debt, such as medical bills while partially repaying others, like mortgage and car loans–stays on your credit report for up to seven years.
Say what?
If filing for bankruptcy lowers your credit score and stays on your record for 7-10 years, how could it actually help your credit? Bankruptcy stops the bleeding if you are delinquent on debt payments or have accounts in collection. It allows you a sort of fresh start to reduce your incurred debt and regain control of your finances. Once you begin paying debts off on time, you begin the process of rebuilding your credit. Otherwise, you may fall further behind and possibly reach the point of no return to improve your credit.
After your bankruptcy is complete or discharged, you can apply for a credit card with some limitations. According to Experian, you’ll likely have the option of cards requiring refundable deposits and subprime cards for people with bad credit. There’s also a good chance that you’ll have to pay higher interest rates and other fees. That said, you still have the opportunity to redefine your financial future.
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