For the average person with substantial personal debt, bankruptcy is often the last resort. Many people will struggle with their budget and try to cope with aggressive collection activity for months before they decide that bankruptcy is a viable solution. One of the reasons that people put off considering or filing for bankruptcy is the concern that it will permanently destroy their credit and purchasing power.
Although bankruptcy does have an immediate, negative impact on your credit score and ability to get credit, in the long run, it can help you improve your credit. With the right plan and budget in place, bankruptcy could give you an opportunity to rebuild your credit.
Bankruptcy will clear many negative marks from your credit report
Every late payment and account in collections in your name shows up on your credit report and drags your overall score down substantially. Negative marks on your credit, ranging from late payments and high balances to collection accounts and judgments will stay on your report for seven years in most cases. Each of those blemishes pulls down your overall score and affects your credit score.
When you file for bankruptcy, you will have the one public record of bankruptcy on your credit report, but most other negative remarks will go away because you file. Checking your credit report after you secure your discharge and challenging any inappropriate negative marks on your report can put you in the position for better credit in the future.
You can begin rebuilding a strong credit history right away
Many people who filed for bankruptcy will find that they start receiving credit card offers almost immediately after their discharge. By opening one or two small lines of credit and paying them off in full every month, you can begin to rebuild a positive credit score that will give you access to better credit offers within a few years.
Rebuilding your credit after bankruptcy will not happen overnight. Depending on whether you file Chapter 7 or Chapter 13 proceedings, the bankruptcy will be on your credit report for either seven or 10 years after your discharge. However, the impact it has on your score will decrease over time.
After a few years, you will be able to qualify for mortgages and larger financing offers. If you are disciplined in your approach to credit after your bankruptcy, by the time your discharge comes off of your report, you could be in a position to have an 800-point credit score.