Many people who might benefit from bankruptcy try to avoid filing if at all possible. They worry about losing their current lines of credit, suffering major financial setbacks and becoming ineligible for credit opportunities in the future.
While bankruptcy does halt collection efforts temporarily and can lead to a discharge of unsecured debts, it also has a negative impact on someone’s credit score and their credit options. Those negative consequences aren’t necessarily severe enough to warrant avoiding bankruptcy entirely.
The short-term consequences
The credit impact of a bankruptcy filing is essentially instantaneous. The courts tend to report to the credit bureaus the same day that someone files. Most lenders and collection companies have subscription services that notify them automatically the same day that someone files for bankruptcy.
Open lines of credit, especially revolving lines of credit, are subject to immediate closure when someone files for personal bankruptcy. The filer typically cannot use any revolving lines of credit after they file the initial paperwork for their bankruptcy. The filer may also notice a significant drop in their credit score. A drop of 200 points is sometimes possible if their credit was acceptable or good prior was acceptable or good prior to their filing.
The long-term consequences
Bankruptcy tends to have a net positive impact on someone’s credit over the long term if they make the best of the opportunity. After all, multiple open, high-balance accounts and other blemishes like missed payments disappear. Only the record of the bankruptcy showing up when lenders or employers look at their credit report after bankruptcy.
Typically, people become eligible for new credit cards and other small lines of credit within a few weeks of a bankruptcy discharge. If the filer works diligently to use credit responsibly and rebuild their credit score as quickly as possible, they may be able to qualify for vehicle loans and mortgages within a year or two of the bankruptcy discharge.
Eventually, the record of the bankruptcy comes completely off of an individual’s credit report. A Chapter 7 bankruptcy is visible on a credit report for 10 years after discharge, while a Chapter 13 Bankruptcy is visible for seven years after the courts discharge someone’s eligible debts.
Understanding the potential credit consequences of a personal bankruptcy filing can help people make an informed decision concerning whether to move forward with bankruptcy. Personal bankruptcy can help filers avoid creditor lawsuits, foreclosure, repossession and other financial hardships. Those who successfully complete bankruptcy may ultimately find themselves in better financial circumstances years after they complete the process.