While filing bankruptcy can give you a fresh start with your debts, many clients are concerned about the long-term impact of a bankruptcy. They're worried about their credit score and their ability to obtain credit in the future.
In many cases, the negative consequences of filing bankruptcy are not nearly as severe as you may anticipate. It's also important to remember that a credit score is simply an indicator of how credit has been used. A high credit score doesn't make an expensive item cheaper, it only reduces the finance charge you pay on top of the item's cost. While your credit score is certainly important, it should not be your main concern if you need to file bankruptcy.
Filing a bankruptcy case will hurt your credit score.
But how much that actually impacts you will vary, in part, based on what your credit score is just before you file.
If you are completely current on your debts and aren't using all of your available credit, your credit score is likely pretty high, and filing bankruptcy will have a bigger impact on your score. However, if you have struggled to pay your bills and have sometimes missed payments, or have stopped paying some bills altogether, your credit score has already been knocked down a bit. Every month of missed payments can continue to bring your score down.
When you file bankruptcy, your credit score will take one big hit, but creditors won't be reporting any more missed payments. This can stop the downward trend, and you can work to bring your score back up. You may be able to reaffirm debts, so when you make payments they are reported to the credit bureaus and your credit improves. You will likely also have the opportunity to obtain new credit and start rebuilding your credit score. The bankruptcy will be reported for up to 7 years for a Chapter 13 or 10 years for a Chapter 7, but your credit score will start to recover much sooner than this.
If you file Chapter 13, you are entering a repayment plan and are not supposed to obtain any new credit until the case closes. With Chapter 7, however, your case will probably only last a few months and you may receive dozens of offers for new credit – both for credit cards and for vehicle loans. Be careful, however, because the interest rates will be very high. Additionally, creditors know that once you file bankruptcy, you can't file again for some time. They know your old debts were wiped out, and want to be first in line to lend you money. If you get into trouble again, you don't have the option of filing bankruptcy and you'll be stuck with these debts at very high interest rates.
Will you be able to buy a home after filing bankruptcy?
This is still certainly an option, although in most cases you will not be able to get a mortgage loan for two to three years after your bankruptcy case. After that, your ability to get a loan will depend on your income and credit score. So it's smart to work to improve your credit score after filing if you think you want to purchase a home within a few years of filing bankruptcy.
Think of this timeline as a positive thing. If you file bankruptcy and discharge your debts, you may be able to start saving money for a down payment. After a couple years, you can accumulate a good down payment to put toward your new home. And with a large down payment, you may get a lower interest rate on your mortgage loan.
Filing bankruptcy may have other consequences, as well.
It may be harder to rent an apartment after filing, although this isn't always the case. Some landlords may see a bankruptcy as a bad thing, but others will realize that you don't have other debts to worry about, so rent would be easier for you to afford. If you apply for a new job, private employers can decide not to hire you because of a bankruptcy filing, although government entities aren't allowed to use this as a factor. For your current job, federal law does protect you against any adverse employment action based on filing bankruptcy. Finally, for jobs with security clearance, filing bankruptcy actually may help you because you have less debt – and therefore, are less of a risk.
Filing bankruptcy is a great way to get a fresh start with your finances, but it is important to know all of the ramifications. You should speak with an experienced attorney about your specific case.