When personal debts become too much to handle, one of the most common solutions for reprieve is to file for Chapter 7 bankruptcy. Doing so gives you time to liquidate assets and repay your creditors, but it can also have a negative impact on your interest rates going forward.
While bankruptcy might be your only option for overcoming a pressing financial dilemma, it is important to consider how it will affect your long-term finances as well. By understanding how Chapter 7 bankruptcy can impact interest rates pertaining to mortgages and other loans, you can better prepare yourself for the future.
Will Chapter 7 bankruptcy lead to higher interest rates?
Experts explain that the average person can lose as many as 150 points off their credit score as a result of filing for bankruptcy. This is because your credit score is an indication of your ability to reliably pay off debt. Your credit score decreases when you file for bankruptcy because it serves as an admission that you are unable to pay your debts, thus creditors will charge you higher interest rates to compensate for the risk of lending to a client with a lower score.
How can you improve your interest rates after bankruptcy?
If filing for bankruptcy pushes your credit score below 620, it may be in your best interest to rebuild your score as soon as possible. Making all future payments on time and using a secured credit card can help improve your reputation as a trustworthy borrower over time.
Chapter 7 bankruptcy is a source of relief for individuals who need time to gather the necessary funds for repaying their creditors. Returning to the same quality of life afterward can be challenging, but you can succeed by properly managing your credit score and interest rates.