Will filing a bankruptcy affect my credit? Yes, it will. However, if you are behind on your bills, home mortgage, or car payment, your credit is likely already being harmed. In many cases, filing a bankruptcy allows you to start to rebuild your credit. After you receive your discharge, your debts will be significantly reduced, and your ability to make payments on new debt will be increased. This is know as your “debt to income ratio.” Lenders frequently look at this ratio in determining whether to lend money to a potential borrower.
In the beginning, especially for the first year after you receive your discharge, it will be difficult to obtain credit, but it will not be impossible. Because you recently filed bankruptcy, you will likely have to pay more to borrow money. Your interest rate will likely be higher and your down payment will likely be larger. But if you wait a little longer, and continue to make payments to your creditors on time, then your score will increase, and the cost to borrow will decrease. It is advisable to wait until your credit score is at or above 650 in order to get better interest rates.
The bankruptcy will stay on your credit for 7 to 10 years after receiving your discharge. After that, it will not be on your report. But just because the bankruptcy is still on your credit, it does not mean that you cannot obtain new credit. In fact, because there are time limits on when you can file a new bankruptcy case, a previous bankruptcy may make you appear to be a better credit risk so potential lenders.
How do I restore my credit after bankruptcy?
After receiving your discharge, your challenge will be to re-build your credit. The best way to restore credit is to commit to sound financial habits. The key to rebuilding credit is to consistently be financially sound over time. In short, this means paying bills on time and meeting all of your obligations with regard to credit. Make a budget, and stick to it. Budgeting allows you to know what you have coming in and where that money is going. Prioritize debt payments, bill payments, and savings. If you need help with budgeting, two recomended budgeting programs are Mint.com and Goodbudget.com.
One possible way to begin to make credit payments is to obtain a secured credit card account from a bank after receiving your discharge. In order to get a secured credit card, you will have to give money to the bank as security for your timely payments. This is similar to using a debit card, except that the debit card does not help to rebuild your credit.
Another way to rebuild credit is to get an unsecured credit card with a low limit, or a store or gas credit card. Obviously, after having just gotten out of a bankruptcy, you will need to be careful with credit cards. But if you keep your limit low and pay off your balance every month will help to restore credit and still limit your risk of getting into financial trouble again.
Also, keep an eye on your credit score and credit report. Review your report in detail, and if any charges are incorrect, dispute them immediately. You can obtain a free credit report and score at myBankrate.
Remember, rebuilding your credit is a slow process. It will not happen overnight. It will take time, diligence, and patience. But keep in mind that you can rebuild your credit after bankruptcy.