How Will Bankruptcy Affect My Credit?

One of the most common worries that people have when considering bankruptcy is how it will impact their credit. Having good credit is an important part of modern life. Taking steps to keep a good credit score is important for a person's financial well-being. However, there are times when bankruptcy is the only viable solution for a person's credit problems. Understanding how bankruptcy will impact a person's credit can help him or her to make a good decision on whether to file bankruptcy and how to deal with the negative impact that it will have on their credit score.

Bankruptcy Impact

Bankruptcy will have a significant impact on a person's credit score, but it is difficult to put an exact number on the amount. The good news is that most people who are considering bankruptcy will already have credit problems such as high debt to income ratios, late payments and low amount of available credit. When a person already has a bad credit, filing for bankruptcy will not create a significant change. In fact, filing for bankruptcy will help a person to be able to gain control of his or her debt and credit usage.

Chapter 7 Versus Chapter 13

The primary difference between Chapter 7 bankruptcy and Chapter 13 bankruptcy is that in Chapter 13 a person repays some portion of the debt while in Chapter 7 the debt is completely discharged. Both types of bankruptcy will have a similar negative impact on a credit score but there are differences. A Chapter 7 bankruptcy will be over a few years sooner than a Chapter 13. This will allow a person who completes a Chapter 7 to begin building good credit sooner. However, lenders may look more favorably upon those who are in or who have completed a Chapter 13 as it involves repayment of the debt. Lenders who do manual underwriting of loans may give borrowers involved in a Chapter 13 more leniency than those involved in a Chapter 7.

Alternatives to Bankruptcy

While there are times that bankruptcy is the only option, it should only be used when necessary. Before filing bankruptcy, a person should make the best effort possible to pay off the debts by working out payment arrangements with the creditor. Debt management organizations can also help those who are in debt to work out payment arrangements. Debt consolidation loans and programs can help debtors by combining many debts into one with one payment and a lower interest rate.

Rebuilding Credit

Whether a person completes a Chapter 7 or Chapter 13 bankruptcy, or completes an alternative repayment method, it is important to make sound financial decision in the future. The most important step is to only borrow reasonable amounts of money that can be comfortably paid back. Simply keeping debt amounts low and making every payment on time will help a person to quickly build a strong credit score.

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