For countless people, bankruptcy is the last resort that can help them eliminate the burden of some or all of their debt to get their lives back on track. However, relief from debt does come at a price. Depending on the type of bankruptcy filed, a bankruptcy will remain on your credit report for up to a decade and may cause your credit score to plummet up to 200 points.
Before you file for bankruptcy, you must understand the financial and credit implications it will have on your credit report. But even though bankruptcy does come with some drawbacks, being responsible with your finances can diminish its adverse effects on your credit over time and help you get back to good financial standing. Here are a few common myths surrounding how bankruptcy affects credit and the facts behind them:
Myth: You will have poor credit as long as your bankruptcy remains on your report
While it’s true that many people will have a dramatically lower credit score after filing for bankruptcy, you can still improve your credit score with a bankruptcy on your record. In fact, with responsible credit management, you can build up your score to the “good” credit range in as little as four to five years. You can immediately start rebuilding credit after bankruptcy by:
- Adding new credit, such as a secured credit card
- Making your payments on time for all remaining debt
- Utilizing less than 30% of your credit card balance
Myth: You won’t be able to get new credit after bankruptcy
While it may be challenging to find traditional unsecured credit cards you are eligible for, there are options for individuals with poor credit history. For example, secured credit cards require you to put down a deposit upfront to serve as collateral if you miss any payments. Secured credit allows you to build your credit score up just like traditional credit cards.
Myth: Bankruptcy ruins your credit forever
Bankruptcy will damage your credit in the short term, but it’s important to remember it will only last for a maximum of ten years. In the meantime, you can learn good financial management habits so that when your bankruptcy is removed from your record, your credit score will be stronger and better than ever before.