Many of my clients who are thinking about filing bankruptcy ask me about how it will affect their creditscore. This is an understandable concern, as your credit score is used by lenders to determine whether you qualify for a mortgage, vehicle loan or credit card and what interest rate they will offer you.
The truth is that a bankruptcy does not look great on your credit score, but neither will continuing to have creditors report your past due debts to the credit authorities. While bankruptcy is not an ideal scenario, it may be your best opportunity to rebuild your credit if you are facing an insurmountable amount of debt. The reason for this is that getting rid of all your outstanding debt will allow you to start the process of rebuilding your credit score immediately. This can be done in less time than you think. The alternative is to allow that debt to linger for a longer period of time and potentially grow to an even higher figure.
My normal advice to clients is to consider their overall financial situation and not solely concern themselves with their credit score. Generally, if you improve place yourself in a better financial position it will be easier to properly manage or completely eliminate your debt. An improved credit score should follow. There are certainly valid reasons for not filing bankruptcy and it is important to pursue other alternatives for debt relief and renegotiation. However, if you are dealing with debt that you cannot get away from, bankruptcy is often the best method to give you a fresh start. Once the bankruptcy process is completed, you can go about rebuilding your credit. There are several keys to rebuilding credit post-bankruptcy but the most important is to learn from the financial decisions that got you into bankruptcy in the first place. Do not take out debt unless you are sure that you can pay it back and have a plan in place to do so. You can use credit cards to make your standard purchases of food and other necessities, but make sure you pay the credit card bill in full at the end of the month, not just the minimum payment.
Another way of obtaining good credit post-bankruptcy is to closely monitor your credit reports. Make sure there are no incorrect reports and that debts which were discharged in bankruptcy are not still being reported. Create a budget for yourself and stick to it. Limit yourself to one credit card so it is easier to keep track of your outstanding balance. If you follow these steps you will return to a good credit score in no time.
But for those of you who have heard that filing bankruptcy means you will never be able to get a mortgage loan, car loan or credit card, this is simply not true. In fact, I am sure that you see and hear advertisements on a daily basis of car dealerships begging people to take loans from them regardless of their credit score. So don’t be concerned about whether lenders will offer you credit. They will. It’s what they do. Instead ask yourself if taking out that debt is right for you.