The average person likely understands that a bankruptcy filing will result in a major short-term blemish on their credit history. Lenders and even employers may consider a bankruptcy when making decisions about a loan or a promotion.
Concerns about creditworthiness may prevent some people who struggle financially from filing for bankruptcy. What many people fail to understand is that bankruptcy can also result in a significant long-term positive impact on someone’s credit.
Filing inspires drastic changes
As soon as someone files for personal bankruptcy, several things happen. The courts provide an automatic stay against collection activity. The person’s credit score drops by quite a bit, possibly 200 points or even more. Lenders who learn about the bankruptcy filing may close or freeze revolving lines of credit. As soon as someone files, their score drops and they may no longer be able to use their credit cards and similar financial tools. However, they also have protection from collection efforts until the courts resolve the bankruptcy.
Rebuilding requires patience
After the courts discharge someone’s eligible debts at the end of bankruptcy, they may begin working to rebuild their credit history. Credit card companies may offer secured cards with annual fees and deposits required within a few weeks of someone’s completed bankruptcy proceedings. While those terms may not be ideal, they allow someone to start establishing a history of on-time payments. Opening new lines of credit as soon as possible after bankruptcy is usually a smart move. Within a few years, people can begin qualifying for better terms and larger loans.
Eventually, the bankruptcy comes off of someone’s credit report. Even before it does, the smart use of credit after a discharge could help someone build their credit score to the same point that it was before their filing. Once the discharge comes off of someone’s credit report, lenders, employers and others who look at credit reports can no longer learn about the bankruptcy.
People often find that a personal bankruptcy filing can significantly improve their credit scores given enough time. As such, focusing on rebuilding credit after a personal bankruptcy filing can help someone accrue a higher score and a strong history of personal credit use. People who know how bankruptcy could affect their credit may feel more confident about their decision to file.
