Can a Bankruptcy Hurt You?

Just How Bad Is Bankruptcy?

How bad a bankruptcy affects credit is determined by the consumer and what is currently on his credit report. A person who has been struggling to pay bills and realizes he is losing the battle may file bankruptcy with a very good credit report and score. In this case, the credit score will take a drastic hit. This is because the credit report has few negative entries and is suddenly inundated with many accounts showing it was discharged in bankruptcy. For the consumer who already has terrible credit, the bankruptcy will have a much less negative effect on a credit score because all the accounts already have a negative entries.

The negative effect associated with bankruptcy is very individual but should not be underestimated. The first two years after filing for bankruptcy, it will be difficult to obtain a loan with a good interest rate.

When you file bankruptcy every account included in the bankruptcy will show on your credit report. Future creditors will be able to see the bankruptcy for seven years; however, after two years the damage to your score is reduced and gets lower with each passing year. If you are proactive and work on building a stronger credit report from the moment you are discharged, you can have a good, solid credit score within two years of being discharged.

Lenders realize things happen and people hit hard times. What is more important is to show that while you filed bankruptcy in the past, you are now able and willing to handle your credit well. You must establish a pattern of showing you have credit and are being responsible.

To build your credit, you must once again establish credit. In some ways you may feel as if this is bad advice -- if someone had to file bankruptcy, why would establishing new credit so soon be a good thing? Because bankruptcy deals such a devastating blow to your credit score, you must begin to add positive credit to your report. If you fail to add positive accounts to the credit report, the credit score cannot begin to improve.

Immediately following bankruptcy, the only credit card you are likely to get is a secured credit card. The secured card should be one that reports to all three credit bureaus and converts to an unsecured card after a certain period of time. After approximately nine to 12 months, if you have handled the secured card well, you may be able to qualify for a small personal loan or auto loan. It is vital to keep balances low on all new credit cards and make all payments on time. If you handle all new credit well, after 24 months you can even qualify for a mortgage.

There are times and situations where bankruptcy is a very good thing. Bankruptcy allows you to get back on your feet and start again. It is a common fallacy that all people who file bankruptcy have just mishandled debt. Bankruptcy happens for many reasons: mishandled debt, careless spending, illness, death of a partner, failed business, lost job, tragic events and much more. Bankruptcy can avoid lawsuits, losing your vehicle or home, and stop collections and garnishments. While bankruptcy should never be taken lightly, there are many times when it is the right move.