Numerous people file for bankruptcy every year to reclaim control of their finances. Bills can become burdensome, and filing for bankruptcy can help someone attain a clean slate. However, filing for bankruptcy is not without consequences. Learn how filing for Chapter 13 bankruptcy can affect credit scores and how you can improve your financial history.
What Is a Bankruptcy Discharge?
A bankruptcy discharge is a permanent order that prevents creditors from taking legal action against a borrower because it releases a Debtor from certain types of debt. If you file for bankruptcy, you are free from paying any debt obligation that has been discharged.
A discharge for Chapter 13 Bankruptcy typically occurs after the borrower has completed the payment plan and made their final debt payment. Chapter 13 is a wage earners plan that helps individuals in debt get a manageable payment plan. During the bankruptcy process, monthly payments typically last three to five years. You can expect a bankruptcy discharge about four years after the filing date.
A court has the right to deny a bankruptcy discharge. A court will not grant a discharge if you filed for Chapter 13 bankruptcy but failed to complete a financial management course. Some circumstances allow borrowers to bypass completing the financial management course. Exceptions to this requirement include inadequate educational programs, specific disabilities, and military duty.
How Long Will a Bankruptcy Filing Remain on a Credit Report?
Once you file bankruptcy, it will appear on at least one credit report from the major credit bureaus. Information on your bankruptcy will appear within the account information section and under the public records section.
Creditors consider bankruptcy to be negative information, as it shows you were previously unable to manage your finances. Negative information can remain on your credit report for several years, depending on the severity. For example, late payments can stay on a credit report for up to seven years.
A Chapter 13 bankruptcy will remain on your credit report for seven years from the date of filing. At the end of seven years, information on your bankruptcy will fall off, and your credit score could increase. Unfortunately, you cannot remove a Chapter 13 bankruptcy from your credit report early. It is only possible to remove incorrect information from a credit report, such as a wrongful bankruptcy report.
How Soon Will My Credit Score Improve After Bankruptcy Filing?
A bankruptcy filing has a significant impact on your FICO score. However, you can begin rebuilding credit about 12 to 18 months after filing bankruptcy. Most people who take steps to improve their credit score can start seeing improvements within the first year after they file bankruptcy.
There are five FICO score categories based on score ranges:
- Poor — 300-579
- Fair — 580-669
- Good — 670-739
- Very Good — 740-799
- Excellent — 800-850
Ideally, you should have a credit score that falls within the good category. Good credit is any score higher than 670. However, many people have a bad credit score of fewer than 579 points after filing bankruptcy. Working on your finances after filing bankruptcy can boost your score, so it falls within the fair category. If you want a good credit score or higher, you will have to work on rebuilding your credit history longer.
Can I Avoid Bad Credit After Bankruptcy With a Preexisting High FICO Score?
Suppose you had a high credit score before talking to a bankruptcy lawyer. Can you limit the negative effects of bankruptcy? Unfortunately, a high credit score before filing could affect it more.
Bankruptcy drops a person’s credit score significantly. A bankruptcy affects a person’s credit score more if it is high. The average drop for scores higher than 670 is about 200 points, while scores lower than 669 drops about 130 to 150 points. You can expect to receive a poor credit rating no matter how high your credit score is prior to filing bankruptcy.
How To Rebuild Credit After Getting Your Bankruptcy Case Discharged
Rebuilding your credit score can seem like a daunting task, but it can be done. Your credit score can slowly but steadily start to improve over time by successfully managing your finances.
Avoid Missed or Late Payments
One of the best ways to improve your credit score is by focusing on your payment history! Payment history is one of five categories that directly affect your credit. Your payment history accounts for 35% of your total score, so it is vital that you pay your bills on time. Many creditors offer automatic payments, which helps you avoid the extra work of remembering due dates.
Get a Secured Credit Card or Loan
Having a bankruptcy on your credit report can make qualifying for a loan or credit limit much harder. Many credit card issuers and lenders are unwilling to work with borrowers that pose a significant lending risk. However, you may be able to qualify for funding and boost your credit by getting a secured credit card or loan!
Secured credit cards work similarly to unsecured credit cards, except that your credit limit equals the amount of money you provide as a security deposit. You may be wary about giving money to credit card companies. Still, you could get your deposit back from a secured credit card after closing your account.
Secured monthly installment loans for bad credit require collateral to secure funding. Examples of acceptable assets include savings accounts, certificates of deposits, vehicle titles, and more. Many people with low credit scores apply for a secured loan because they offer higher approval rates and higher loan amounts.
Making on-time payments for your secured loans can help you reestablish your credit over time. Payment history is the most crucial factor for FICO scores.
Sign Up for a Credit Score Boost
There are programs you can sign up for that provide a boost to your FICO score. Experian Boost helps improve credit reports by factoring in qualifying monthly payments. You could get credit for numerous bills, such as phone bills, utility bills, and streaming service bills. The basic membership is completely free, and you do not need a credit card to sign up.
Monitor Your Credit Score
Individuals can get one free credit report from each of the three main credit bureaus (Equifax, Experian, and TransUnion). Checking your credit report throughout the year can help you stay on track when attempting to raise your credit score. After a bankruptcy discharge, you can review your credit report to confirm the change.
If you’re interested in learning more about bankruptcy, like “if I file bankruptcy what happens to my car?” then check out the rest of our blogs!
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