Overwhelming financial difficulties can be incredibly challenging to overcome. In certain cases, they can be near impossible to surpass without outside aid.
Bankruptcy can provide relief from unmanageable debt. A common misconception that keeps many from using it is that it irreparably harms your credit score.
Bankruptcy is a legal process that allows individuals or businesses to eliminate or repay their debts under the protection of the court. There are two primary types of bankruptcy for individuals, Chapter 7 and Chapter 13. Chapter 7 involves liquidating assets to pay off debts, while Chapter 13 involves creating a manageable repayment plan over a specified period.
Impact on credit
Your credit report will reflect a bankruptcy filing negatively. Your credit score will drop, possibly by 100 or more points, which may affect your ability to obtain credit cards, loans or favorable interest rates for some time. However, the effect is not permanent. A Chapter 7 bankruptcy typically remains on your credit report for ten years and a Chapter 13 one for seven years.
Potential next steps
While waiting for the removal of the bankruptcy from your report, you can take steps to rebuild your credit. You can obtain a secured credit card, which requires a cash deposit as collateral and can be easier to get with a lower score. Making on-time payments and keeping balances low can also demonstrate responsible credit use and help boost your credit score over time.
According to the American Bankruptcy Institute, over 35,000 individuals filed for bankruptcy in June of 2023 alone. Bankruptcy is neither uncommon nor shameful. While the immediate effects are negative, bankruptcy is not the end of your financial journey. With time, responsible financial habits and a commitment to rebuilding your credit, you can work towards a healthier financial future.