Worried about bankruptcy ruining your chance of ever getting a credit card again? When filing for bankruptcy, it seems like you’ve got a choice between two evils: stay in your painful financial situation or go down a path that seemingly ruins your credit permanently.
It helps to know the good and bad of how filing for bankruptcy affects your credit card debt and credit score so that you can make an informed decision about your particular financial situation.
The Good: Filing for bankruptcy will get rid of your credit card debt.
When you file for Chapter 7 bankruptcy, the goal is to rid yourself of any “unsecured debt.” That means any debt that does not involve property (such as your house or car). If you want a clean slate, filing for Chapter 7 bankruptcy will eliminate your credit card debt. For many people, this is a huge sigh of relief and helps them rebuild their finances without the burden of worrying about overwhelming credit card debt.
The Bad: Bankruptcy will temporarily damage your credit score.
Wiping your credit card slate clean through Chapter 7 bankruptcy does come at a price. A few things may hit you hard:
- Your credit score may go down between 100-250 points. The higher your credit score before bankruptcy, the more points you will lose. However, even if you had a low credit score before bankruptcy, your credit score may still take a hard hit. On the other hand, your future credit score may not look so bleak. The pulled credit reports for clients list the “existing credit score’ and the “estimated 12 month post-bankruptcy credit score.” In some cases, the net effect is positive. Now, whether that actually happens depends on whether you make your payments on time in the future, but the credit reports that are pulled from the 3 major credit reporting agencies often times project an increase in your credit score 12 months post-petition.
- You will have major problems getting credit. Trying to get a home loan, car loan, or normal credit card may become very difficult for a few years. However, a Chapter 7 bankruptcy (liquidation) does not disqualify you from obtaining a FHA-insured mortgage if at least 2 years have elapsed since the date of the bankruptcy. You must have re-established good credit or chosen not to incur new credit obligations. A period of less than 2 years, but not less than 12 months, may be acceptable if the borrower can show that the bankruptcy was caused by circumstances beyond his or her control, and has managed his or her financial affairs in a responsible manner. Always check with your lender because other mortgage insurers may have different guidelines.
- You may have to pay high interest rates for any credit you do receive until you rebuild your credit. Because of your bankruptcy, you are seen by lenders as a risk. If you do receive credit, expect to pay a high interest rate, which means more money out of your pocket.
The Recovery: Stay on your best behavior as you dig your way out of your credit hole.
You can get your credit back—including getting a normal credit card again—in just a few months But you need to behave your absolute best financially.
- Make every payment on time. No ifs, ands, or buts here. Every payment MUST be made on time. Just think—every on-time payment you make is another scoop of dirt that digs you out of your hole.
- Keep your balances low. The common wisdom is to keep your credit balances at or below about 25% of your credit limit. In other words, don’t splurge and max out a credit card while you’re in recovery mode.
- Start with secured, department store, and small bank credit cards. Don’t get tempted by credit card offers you receive in the email. These are often predatory lenders taking advantage of your bad financial situation. A secured credit card means you actually put up money ahead of time and that serves as the credit you draw upon. Stores, small banks, or credit unions may also offer credit cards with high interest rates and a lot of restrictions—but they do serve as ways you can re-establish credit.
Considering the costs of bankruptcy to your credit? Call us for a free consultation.