Filing for bankruptcy can have a significantly negative impact on your credit rating. Depending on your credit rating before filing, scores can drop between 100 and 300 points as soon as the bankruptcy becomes part of your credit report. Credit can be rebuilt while in bankruptcy, if you follow a few responsible money management techniques.
Definition
Chapter 7 and Chapter 13 are the two primary types of personal bankruptcy. Chapter 7 employs a liquidation of assets to pay creditors. Chapter 13 involves a structured repayment plan combined with the elimination of unaffordable debts to help consumers reclaim good financial well-being. It is important to take steps to rebuild credit immediately after a Chapter 7 bankruptcy and during a Chapter 13 bankruptcy.
Timing
A consumer's credit rating reflects his financial strength at a specific point in time. By law, filing bankruptcy may be listed as part of a consumer's credit file for up to 10 years. However, the negative impact of a bankruptcy on a credit rating decreases over time.
Payments
One of the best ways to begin rebuilding your credit rating during or after a bankruptcy is to make your bill payments on time. Payment history impacts a credit score by 35 percent. One month of on-time payments is a start, but it takes between six months to one year of consistently paying your bills on time to improve your credit rating.
Credit Cards
Another way that credit can be rebuilt after or during bankruptcy is to obtain and responsibly manage a credit card. A mix of credit is 10 percent of the overall credit rating calculation. A mix of credit includes installment loans and revolving credit. An unsecured credit card may be out of reach for consumers with a recently filed bankruptcy, but secured cards and merchant cards are an option. The key is to obtain a credit card that reports payment information to the three credit bureaus. Secured cards are backed by consumer's cash deposits and many involve application and usage fees, but they report on-time payment information to credit bureaus. Merchandise cards, gas cards and department store cards are often easier to obtain than bank credit cards. No matter what type of card you select, pay the bills on time.
Debt
Outstanding debt is 30 percent of a credit rating calculation. Outstanding debt is the ratio of what is owed against the available credit line. Keep the balance on your new credit card low, and your credit-to-debt ratio will be high. For example, if you have $500 of available credit, only use $100 to $200 at a time. Pay off the balance on time each month to show responsible debt management.
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