Bankruptcy is not a simple way out of debt or an easy ride to a fresh start. It is intrusive and draining, though sometimes absolutely necessary. Before filing for bankruptcy, it is important to understand the short- and long-term effects of bankruptcy on your credit score.
Severe Drop
According to Bankrate.com, bankruptcy can lower your credit score by hundreds of points. Also, creditors that are being paid or discharged through your bankruptcy may continue to update the credit bureaus, making it seem like account delinquency is current instead of negotiated or paid. Bankrate.com recommends checking your credit report after filing for bankruptcy to confirm the accuracy of information and address unnecessary reporting from creditors.
Long-Term
Bankruptcy can only stay on your credit history for a maximum of seven or 10 years, depending on the chapter of bankruptcy you filed. While this will definitely affect your credit score, it does not necessarily destroy it. Both Bankrate.com and MSN Money's Liz Pulliam Weston agree that if different types of credit are applied for and used responsibly after bankruptcy, your credit score could return to a "fair" or even "good" rating within a few years. However, if credit is not used or used irresponsibly, your credit score will continue to rate at "poor" or even get worse.
Limited Availability
With a low credit score comes higher interest rates for any line of credit and even limited credit options. If your score is low enough, only secured lines of credit will be available to you. Secured lines of credit are loans or credit cards secured by a funded bank account or item of value, like a car. Even these lines of credit will have high interest rates that will put a dent in your wallet if you do not pay in full each month.
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