How Bankruptcy Effects Your Credit Score

Bankruptcy is a tricky affair, and declaring it can ruin good credit. When you file for bankruptcy, your debts are supposed to be settled, but with the note that this occurred because you filed for bankruptcy. This note will show up on your credit history for about 7 to 10 years, depending on the credit reporting agency. Because lenders look at your past ability to pay back your loans in order to determine your future ability to pay your debts, a bankruptcy note may make it difficult to find new lines of credit or get new loans.

This is a “good” bankruptcy scenario; more often than not, the credit reporting agencies close the accounts incorrectly, reporting the accounts as either open or closed with a huge balance and no record or note of the bankruptcy filing. While bankruptcy itself will not keep you from finding credit or loans, the false reporting can damage your credit history so badly that you may be denied credit that you should be able to receive. As mis-reporting is rampant among the credit reporting agencies, you should check your credit report from all three national agencies two to three months after filing for bankruptcy. This allows some time for the bankruptcy to process. If there are mistakes on the report, you should work to fix them immediately as credit scores are being used more often in everyday situations, such as to rent an apartment or get a job.

Bankruptcy is not the best option, but it may be a better option than leaving old, unpaid debts on your credit history. In this situation, a bankruptcy may help you build your score up because old, unpaid debts tell new creditors that you are unwilling to deal with your debt. At least with a bankruptcy, you have made some sort of action to deal with your debt.

Re-establishing your credit score from bankruptcy will be difficult, but it is not impossible. You can find secured credit cards, which usually max out at $500. By using this credit card for small purchases that you can pay off immediately, you are building good credit. You may also find yourself eligible for gas cards, which work in the same way. Also, mortgages may help to rebuild your credit after bankruptcy. Oftentimes, two to three years after declaring bankruptcy, you may be eligible for an FHA loan that has moderate interest rates. Paying your mortgage on time will give your credit a big boost.

Just remember, bankruptcy is never the choice you want to make; but some of us have to. If you do, it’s not the end of the world. Just be careful that once you have declared, you start on the right track to establishing your credit.