Make Filing for Bankruptcy a Last Resort

By: Lee Bell
Submitted: 2008-10-29 18:04:15
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When your budget have gotten out of control for a long period of time, you might be receiving constant phone calls and certified letters from creditors. Before resorting to bankruptcy to help the situation, it is essential that you understand that doing so will have grave consequences on your credit score for years to come, so make sure to consult with a lawyer regarding your rights before taking the steps to begin the process.

With a bankruptcy, your credit score will plummet. Even debts that are dismissed during the bankruptcy procedure will not go off of your credit report for some time. These items will remain on your credit score until you take the initiative to get them removed. The two different kinds of bankruptcy will have different effects on your credit score.

Kinds of Bankruptcy

A Chapter 13 bankruptcy does not mean that your debts are wiped out. Instead, this is a restructuring of your debt. What will occur in the bankruptcy proceedings is that you and your creditors will work out a plan to get the money paid back on a time table that will actually work. This type of bankruptcy works well for people that are having a short-term financial crisis, such as a job loss or health crisis. Although this type of bankruptcy will stay on your credit report for seven years, it does show to future creditors that you are planning to pay for your debts. If you are able to get your debt paid off after you have filed for a Chapter 13 bankruptcy, then you will be eligible for new credit after about a year.

The second type of bankruptcy is known as Chapter 7. This is a more significant type of bankruptcy in terms of the overall and lasting effect on your credit score. In this type of bankruptcy, all of your debt will be absolved except for child support, taxes owed, and alimony. The drawbacks of a Chapter 7 bankruptcy is that you are very unlikely to get any type of credit for at least two years. The bankruptcy will stay on your credit report for the next ten years. The only type of credit that you will still be able to get is a federal student loan, as it is illegal for you to be denied a federal student loan after a Chapter 7 bankruptcy.

Fix Your Credit Score After Bankruptcy

It is very likely that you may have some trouble getting new credit after you have executed a bankruptcy. It will be at least two years after the bankruptcy before you are able to get a mortgage. After a Chapter 13 bankruptcy, you might be able to get a mortgage after the first year, but there are no certainties. As far as credit cards are affected, it will be very difficult to get one initially.

Once you have had a bankruptcy, you want to try to create a positive credit history so that lenders can see that you have changed and are willing and able to pay back the money that you owe. One great way to do this is to make sure that you pay your bills on time each and every month. With that approach, lenders will feel like you deserve a chance. You may have to pay a higher interest rate. Once you improve your credit score, however, it is simple enough to refinance any credit that you have.

Since lenders focus principally on the last 12 to 24 months of your credit history, you can re-establish your credit fairly quickly following bankruptcy. With patience and willingness to meet lenders' demands, you can re-establish your credit and obtain a better credit score.

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