Credit card debt remains one of the leading causes of bankruptcy. While the prospect of filing may scare you, doing so could also help you improve your credit over time. Yet, whether you file Chapter 7 or Chapter 13 bankruptcy, your credit score will take an immediate hit. But by knowing the timeline for rebuilding your credit, and by developing good credit habits, you can make this process easier.
How bankruptcy impacts your credit
The amount of time your bankruptcy remains on your credit report depends on which type you file. If you file Chapter 7, your bankruptcy stays on your credit report for 10 years. If you file Chapter 13, your bankruptcy stays on your credit report for seven years. Filing Chapter 7 may also cause a sharper decline in your credit score than filing Chapter 13. Since you will discharge most of your debts through Chapter 7, creditors may hold your nonpayment against you. When filing Chapter 13, you will repay most of your secured debts, which creditors prefer to see.
How you can rebuild your credit
So long as your bankruptcy remains on your credit report, it will affect your credit score. Yet, you have ways to improve it soon after filing. You may fear this will be difficult, since bankruptcy will likely lead to your credit cards’ cancellation. If it does, you can apply for a secured credit card, which requires a deposit equal to your credit limit before you start using it. By using your credit judiciously and paying your balance in full each month, your score will start increasing. You may also need to make a large purchase – like a vehicle – after filing bankruptcy. In this case, you can co-sign a loan with a friend or relative who is willing to take the risk. Defaulting on this loan will hurt both of you. But paying it in full and on-time can improve your credit score.
By developing good habits and having the patience to stick with them, your credit score can start recovering. Consulting a bankruptcy attorney can help you consider your options for building a better financial future.