How Bankruptcy Affects Your Credit
Bankruptcy is a worst-case scenario.
When an individual is unable to pay off their debt, or the payment is causing significant financial hardship, they may be eligible for a forgiveness of their debt, a process known as bankruptcy.
Many people improperly view filing for bankruptcy as an easy way out of overburdening debt and bills—a “get out of jail free” card—but in fact it can have long-term negative consequences on your finances and your life.
Those who file for bankruptcy may have non-exempted property seized by the bank to pay off debt, and the remaining assets of the debtor are appraised to recover as much of the cost as possible. This can completely turn your life upside down, and make it hard to get back on your feet financially. But the long term consequence of bankruptcy is one of the most severe—how it affects your credit score.
From the perspective of credit, bankruptcy should not be seen as a quick fix, but as a last resort. And here’s why:
For starters, it is crucial that people understand that while filing for bankruptcy does give you an opportunity to help you rebuild your credit, it does not give you a clean slate; it allows you to live free of debt again, but does so with the side effects of adversely harming your credit score and making it difficult to rebuild credit in the future.
A person’s credit score is a numerical expression of their creditworthiness, used by lenders and creditors to access the statistics showing the likelihood that the person will repay his or her debts. The scale ranges from 300 to 850—the higher the number the more creditworthy the person is considered to be. Credit history is one of the ways a person’s overall credit score is determined.
Your credit score plummets if you file for bankruptcy and it stays on your credit history for up to 10 years, depending on the type of bankruptcy filed for. It takes a long time to rebuild credit, and the knowledge that you have already filed for bankruptcy makes creditors wary of lending to you.
Why is credit so important? Because beyond just allowing you to have credit cards, establishing good credit is essential in many sectors of industry, and has adverse affects on important life events, such as:
- Buying or renting a home
- Buying or leasing a car
- Getting a loan (business, student, or private)
- Finding a job (employers are permitted to check your credit score before hiring you)
- Starting a small business
- Higher charges for security deposits
- Higher insurance premium
- Higher interest rates
Like it or not, building a life is significantly affected by credit score, and bankruptcy can cause huge obstacles when it comes to supporting yourself and your family down the road. Thus, filing for bankruptcy should truly be a last resort.
But for those overwhelmed by unpaid debt and overdue bills, the consequences of bankruptcy are better than the alternative. Late payments and unpaid debts can stay on your credit record for up to 7 years, so for some people getting the entirety of the debt wiped clean is worth the extra three years that their credit will be adversely affected.
Filing for bankruptcy is a lengthy, stressful, and emotional process that has a significant toll on the persons involved. Health, relationships, and self-esteem can all be adversely affected by the stress induced from the legal process of filing for bankruptcy, but the affect it has on your credit and life can last much longer.
The decision to file for bankruptcy is a serious choice, and choosing what type to file for can be even tougher. Read about the different chapters of bankruptcy.
Consulting a bankruptcy attorney is crucial to understanding if bankruptcy is the best choice for you or deciding which chapter to file for in your situation.