How Does Bankruptcy Affect Your Credit Score in the Long Run?

What keeps someone in massive debt from filing for bankruptcy? In many cases, it’s a fear of damaging their credit score. Your credit score is the key to securing new lines of credit, enjoying lower interest rates on the debt you do carry, and otherwise making your financial status more secure. However, it doesn’t need to be the reason that you put off a decision that makes your life easier and less stressful. Learn more about how bankruptcy can impact your credit score and what this means for you.

If you’re wondering if bankruptcy is the right choice for you, it’s time to talk to an attorney. Schedule a consultation with the bankruptcy attorneys in Mobile at Padgett & Robertson by calling 800-303-1416 now.

The Immediate Effects of a Bankruptcy Filing

For most people, filing bankruptcy does mean an immediate drop in credit score. A lot depends on how you’ve managed your credit up until this point. If you’re like many people, you’ve kept up with your monthly minimum payments.

You may be scraping by, but you are making minimum payments and avoiding late fees. Your credit score may have been trending downward for months or even years, depending on how long you’ve been carrying so much debt. Your credit score isn’t great—but it’s not the worst it could be.

In this scenario, expect a fairly significant drop in your score immediately after filing. It’s unavoidable, unfortunately. The higher your credit score is, the more you can expect it to drop.

If you have fallen behind on payments, have accounts in collections, and have a significant amount of defaulted accounts, your credit has likely already taken a significant hit. For those with poor credit in the 400-500 range, bankruptcy may actually cause a slight increase in credit score.

Your Credit Score Long-Term

However, as you think about this, consider why you want a credit score. The benefit of a high credit score is that it allows you to access lines of credit more easily. At this point, you have too much credit. Even if you want to tap into credit more easily in the future, at this point in time, you truly do not need more access to credit—no matter the interest rate.

For that reason, it matters more what happens to your credit in the long-term. Your credit score will be affected by your bankruptcy for up to 10 years, but the impact it has decreases over time. As time passes, your bankruptcy holds less weight in your credit score calculation than other factors. When this happens, your current use of credit will be more important than your past use of credit.

This is where some people trip up. The same habits that got them into bankruptcy can get them back into financial trouble once their credit score starts to bounce back. By carefully rebuilding your credit and your financial habits, you can avoid this trap.

Managing Your Credit After Bankruptcy

First, it’s important to accept that your credit will be affected by bankruptcy. This protects you from credit repair schemes that promise to bring your credit score back immediately after bankruptcy. No one can promise this, and these schemes can only bring you more financial distress. Accept that you’ll have to put in some work to help your credit repair and you’ll be much better off.

You must be on top of your bills at all times. While the occasional late payment may not significantly affect someone with excellent credit, someone with a risky credit rating just doesn’t have that leeway.

Use credit minimally and wisely. There are different ways to rebuild your credit, but all involve using credit. You might keep a car loan or mortgage during the bankruptcy and continue paying on those, or you may look into a secured credit card after your bankruptcy is finished.

Considering Bankruptcy? Contact Padgett & Robertson

If you’re still weighing your options as you look at your finances, let’s talk about how bankruptcy could help you. Set up a consultation with our team now by calling us at 800-303-1416 or filling out our online contact form. We’ll look over your finances and explain how bankruptcy could give you a fresh start.