Bankruptcy is a legal tool that allows individuals and businesses in Northern Kentucky overwhelmed by debt to either erase their obligations or reorganize them under court supervision.
While it provides a financial reset, one of the most immediate and significant impacts of declaring bankruptcy is on one’s credit score. W. Ron Adams, a renowned bankruptcy attorney explains how bankruptcy affects your credit score and more crucial details for anyone considering this step.
Key Takeaways:
- While bankruptcy poses a challenge in maintaining a healthy credit score, its impact, however severe, is not permanent.
- Monitoring your credit reports, paying bills on time, and obtaining a secured credit card are some of the key steps you can take to rebuild your credit score after filing for bankruptcy.
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Bankruptcy Effect on Credit Score
The effect of bankruptcy on a credit score varies depending on the individual’s credit status before filing. Typically, a higher score will see a more significant drop.
For someone with a good to excellent credit score, for instance, 780, filing for bankruptcy can lead to a decrease of 200 points or more. Meanwhile, an average score of say, 680, can see a drop of 130 to 150 points.
This is primarily because the credit score algorithm considers bankruptcy one of the most negative marks possible, reflecting serious financial distress.
Duration of Impact
Bankruptcy does not permanently blot your credit report. The length of time bankruptcy remains on your credit report depends on the type of bankruptcy filed:
Chapter 7 Bankruptcy
This type of bankruptcy, which involves liquidating assets to pay off debts, remains on your credit report for 10 years from the filing date.
Chapter 13 Bankruptcy
In this case, debts are reorganized and repaid over a period of 3 to 5 years. Chapter 13 bankruptcy stays on your credit report for 7 years from the filing date.
Gradual Recovery of Credit Score
While the initial impact on your credit score is significant, your score can begin to recover even while bankruptcy is still on your report. Over time, the negative effect of bankruptcy diminishes, especially if proactive steps are taken to rebuild credit.
Here are some strategies you can adopt to improve your credit score post-bankruptcy:
1.Monitor Your Credit Reports
Regularly check your credit reports for inaccuracies. Disputing errors and getting them corrected can help improve your score.
2. Secure a Credit Card
Obtaining a secured credit card, where you deposit money up front as a security for your credit limit, can be an effective way to start rebuilding credit. Ensure that the issuer reports to the three major credit bureaus.
3. Pay Bills On Time
Timely payment of bills, including utilities, rent, and credit cards, is crucial. Payment history is the most significant factor affecting your credit score, accounting for 35%.
4. Consider a Credit-Builder Loan
These loans, offered by many credit unions and banks, are designed specifically to help individuals build credit. The money borrowed is held by the lender, and you make payments until the loan amount is reached. The lender reports your payment history to the credit bureaus.
Consult the Best Erlanger KY Bankruptcy Attorney
Do you need to learn more about bankruptcy and how it may affect your credit score? Talk to the most knowledgeable and experienced Erlanger KY bankruptcy attorney, W. Ron Adams. He’ll provide guidance based on your unique circumstances and support you in resetting and achieving your financial goals. Contact W. Ron Adams Law to schedule your free consultation.
