The decision to file for bankruptcy is a big one, and those who understand the implications of a filing do not take it lightly. Probably the biggest reason to be cautious about filing for bankruptcy is the impact a filing has on one’s credit. While a bankruptcy filing may not have an immediate drastically negative effect on one’s credit score, depending on the debtor’s circumstances, there are certainly more long-term challenges it presents.
A bankruptcy filing will negatively impact one’s credit score for as long as it appears on one’s credit report. For Chapter 7 bankruptcy, this is ten years from the filing date. For Chapter 13 bankruptcy, the number is ten years. During that time, one will have challenges obtaining credit since many lenders will not grant credit with a bankruptcy on one’s credit report. This can obviously make it challenging when one needs to finance a home or auto purchase.
This isn’t to say one will be unable to obtain any credit for the time the bankruptcy remains on record. It’s just that one’s options for credit may be limited to loans and credit cards with not-so-great terms. All the more reason, in this case, to make wise use of credit.
All that being said, credit is not something to be avoided after bankruptcy. In fact, wise use of credit can actually help speed one’s credit recovery. The first step folks usually take is to apply for a credit card with the best terms they can find, and slowly begin to carefully use and build up their credit. Over time, they will be able to obtain credit with improved terms.
Source: Source: USA Today, “Personal Finance: Re-establish credit after bankruptcy,” Robert Powerll, July 4, 2014.