For anyone who is struggling with debt and considering bankruptcy, a common concern is how filing bankruptcy may affect their credit scores and long-term financial well-being. While it is true that filing bankruptcy does typically result in a reduced credit score in the short term, it can actually have a positive effect in the long run for those who take steps to restore their financial health after bankruptcy.
Creating a clean slate
When people fall behind on their debts, each late or missed payment chips away at their credit scores. As late fees and interest charges pile up, debts continue to grow, making it increasingly difficult for borrowers to catch up on their payments. This process can continue for years or even decades, creating an endless cycle of unpaid debt that will wreak havoc on a person’s credit profile over time. In many cases, bankruptcy can provide a way out of this vicious cycle by giving borrowers a chance to begin again with a clean slate.
By making sure to pay all of their bills on time each month, borrowers can begin the process of rebuilding credit immediately after bankruptcy. Keeping up with payments on things like rent, utilities and child support can lay the groundwork for a new pattern of responsible money management that will be reassuring to potential lenders.
Although it can be scary to take on new debt after bankruptcy, using credit in a careful, responsible manner can be an effective way for people to improve their credit scores more quickly. When using credit in this way after bankruptcy, borrowers should proceed with great caution and make sure never to borrow more than they can afford to repay on time.
The most common type of consumer bankruptcy, known as Chapter 7 or “liquidation,” can be used to eliminate many types of debt including credit card balances, medical bills and other unsecured loans. In some cases, but not always, borrowers may be required to give up certain items of property in order to have their debts discharged through Chapter 7.
Another type of bankruptcy, called Chapter 13 or “reorganization,” involves creating a manageable payment plan that allows borrowers to catch up on their overdue debts over a period of a few years. This type of bankruptcy does not typically require borrowers to surrender any assets, and can even help stop foreclosure, making it an attractive option for many homeowners who are behind on their mortgage payments.
Every borrower’s situation is different, and each type of bankruptcy has its pros and cons. When considering bankruptcy, it is important for borrowers to consult with a knowledgeable bankruptcy lawyer who can help them understand their options and will work with them to create a debt relief plan that is custom tailored to fit their individual circumstances.