Despite the many benefits of filing for bankruptcy, such as the ability to discharge or reorganize debt, there are potential disadvantages to be aware of as you consider your next step. For example, you need to fully understand what will happen to your credit rating if you proceed with a bankruptcy filing.
There is no denying the fact that a bankruptcy is considered a negative event. Not only will it drag down your credit score, but it can also make it very difficult to secure a loan in the future.
Something to keep in mind is your credit score before filing for bankruptcy. If you have a high score, you can expect to experience a sizable drop. However, if your credit is already bad, there may not be much room for your score to fall.
Is there a difference between Chapter 7 and Chapter 13?
There are both pros and cons associated with Chapter 7 and Chapter 13 bankruptcy. For example, Chapter 7 allows you to discharge many of your debts, while Chapter 13 is more about reorganizing your debt.
There is also a big difference in regard to the impact on your credit:
- A Chapter 7 bankruptcy will remain on your credit report for 10 years
- A Chapter 13 bankruptcy will remain on your credit report for seven years
As the years go by, the impact of bankruptcy on your credit score will lessen. So, even if you file for Chapter 7, after a couple of years, you may be able to secure a loan and take small steps toward improving your score.
It's possible to revive your credit score
Even though a bankruptcy filing will hit your credit rating hard and fast, you can revive your score in the years to come. Some of the best ways of doing so include:
- Make all future payments in full and on time
- Apply for new credit, even if that means a secured credit card
- Review your credit report and score at least once a year to track your progress and check for inaccuracies
The negative impact on your credit rating is one of the primary drawbacks of going through bankruptcy. Even so, when you compare this to the benefits, you may come to realize that a bankruptcy filing is the best way to get your finances back on track.