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For many, declaring bankruptcy is the only way to deal with overwhelming debts. Medical bills, divorce, loss of employment, and financial emergencies can all necessitate filing for bankruptcy rather than being saddled with debts that are almost impossible to pay at their current income level.

When you declare bankruptcy, it will appear on your credit reports for up to ten years. When bankruptcy is listed on your credit reports, it severely harms your credit score until it is removed. This means it will affect not only your credit score but also your future financial decisions.

Let us look at how filing for bankruptcy will impact your future. We will also look at ways to rebuild your credit and heal your financial situation.

What bankruptcy looks like on your credit reports

Bankruptcy is a public record that can appear on your credit reports and will hurt your credit as long as it is listed.

According to the Fair Credit Reporting Act, a Chapter 7 bankruptcy may appear on your credit reports for ten years from the date you file. A Chapter 13 bankruptcy typically stays on your records for seven years but can remain for up to ten years in some instances. Both have similar effects on your fico score.

Accounts that are discharged in bankruptcy will remain on your credit report; they will be reported as "discharged" with zero balance. Future lenders can see all these accounts while deciding whether to approve your loan request.

How bankruptcy impacts credit scores

Most people choose between Chapter 7 and Chapter 13 when filing for bankruptcy.

Chapter 7 bankruptcy

Chapter 7 is meant to help you eliminate your non-exempt assets or valuable property by selling it all.

Your debt is paid off with the money from the sale. Most of the time, debtors don't have enough assets (that aren't exempt) to pay back their debt. But the court still gets rid of those bills.

Chapter 7 can stay on your credit report for ten years.

Chapter 13 bankruptcy

With Chapter 13, most of your unsecured debt, like personal loans, can be wiped out. Other debts, like a mortgage or car loan, can be paid back in part over three to five years.

Chapter 13 bankruptcy can stay on your credit report for up to seven years with the three major credit bureaus.

Chapter 7 will hurt your creditors the most out of the two choices. That's because you don't have to pay anything back. So, banks and other lenders see you as a more significant credit risk. Chapter 7 could hurt your score more because of this wrong impression.

Your history of making payments may give future lenders a better idea of how reliable you are with money. So, Chapter 13 can be slightly better for your credit score.

Long-term Impacts of Bankruptcy

Bankruptcy can long-term affect an individual's financial and overall quality of life. Here are some of the long-term consequences of bankruptcy:

Faced with higher interest rates

"One of the major impacts is higher interest rates. If you are approved for credit after filing for bankruptcy, you may face higher interest rates than you would have before due to the perceived risk associated with your poor financial history," said Shaun Connell, CEO and Founder of Learn Financial Strategy. "Banks and other lenders view bankruptcy as an indication of financial instability, and they may be hesitant to lend you money."

Bankruptcy hurts a person's credit score, and a low credit score indicates a higher risk of default. "This often leads to higher interest rates, as they are trying to offset the risk of loaning money to someone in this situation. It can make it more difficult to obtain and repay loans, which could impact future financial decisions where you may be more likely to miss payments or tend to make quick decisions out of frustration that isn't in your best interest," added Connell.

Future employment opportunities

Filing for bankruptcy could impact your future employment opportunities depending on the specific circumstances and the industry in which you seek employment.

Some employers may conduct credit checks on job applicants, and a bankruptcy on your record may make you less attractive as a candidate. It can raise concerns about your financial responsibility and potentially impact your chances of getting hired.

Certain professions like finance or law enforcement may require a clean credit history. Suppose you are applying for a job in the financial sector or other industries where financial responsibility is critical. In that case, a bankruptcy on your record may raise concerns about your ability to manage money and meet financial obligations. It could lead potential employers to view you as not financially responsible and unsuitable for the position.

However, there are many other industries and jobs where bankruptcy may be less significant of a factor. For example, suppose you are applying for a job in a field where financial responsibility is less critical, such as creative or technical fields. In that case, bankruptcy may be less of a concern.

Difficulty buying back lost assets

One of the short-term consequences of filing for bankruptcy is the loss of assets," said Paw Vej, Chief Operating Officer of Financer. "Almost immediately after filing, you'll have to sell your real estate properties, cars, antiques, and everything else that you own to raise money for creditors. Although this is a short-term consequence, it has some pretty huge long-term impacts. Depending on the type of bankruptcy you filed, your credit score will plummet and stay low for 7-10 years. This means that you will have a harder time applying for mortgages and acquiring credit to buy back your assets."

Depending on the type of bankruptcy filed, some assets may be safe from seizure, but others, like a second home, a valuable collection, or expensive jewelry, may be sold.

"Additionally, if you plan on acquiring assets by starting a business, you'll still find it difficult to persuade backers and investors. Having them look past your past bankruptcy can be a tough ordeal. Thus, on top of losing your existing assets, bankruptcy will make it hard for you to acquire new ones for up to a decade," added Vej.

Psychological impact

Filing bankruptcy can have long-lasting psychological impacts on you, depending on your circumstances and support network.

The experience of bankruptcy filing can be overwhelming and stressful, leading to feelings of anxiety, shame, and embarrassment. This may cause social isolation and strained relationships, both personal and professional.

Additionally, bankruptcy can lead to a loss of self-esteem, contributing to feelings of hopelessness and helplessness. In some cases, the psychological impact may lead to more serious mental health issues, such as depression or anxiety disorders, which may require professional treatment.

It would be beneficial for you to seek the help of a mental health professional or financial advisor to address the emotional and practical aspects of bankruptcy. It's important to understand that bankruptcy is a tool to manage debts and does not define your worth as a person. With time and effort, you can rebuild your financial and emotional well-being.

How to Rebuild Credit After a Bankruptcy

The credit repair process can begin as soon as the bankruptcy is completed and discharged. Once the bankruptcy is discharged, you can start taking steps to rebuild your credit score and improve your creditworthiness.

  • One of the first things you should do is review your credit reports to ensure that all the information is accurate and up to date. If there are any errors or inaccuracies, you can dispute them with the credit bureaus.
  • Next, you can rebuild your credit by applying for secured credit cards or credit builder loans. These credit products are designed to help establish a positive credit history and improve their fico credit score.
  • You can become an authorized user on a credit card account, after which the account's payment history and credit utilization may be reported on your credit report, potentially raising your credit score. But if the primary account holder fails to make timely payments or exceeds the credit limit on the card, it may hurt your credit.
  • You can also get help with this process from a credit repair company. But watch out for scams that exploit people who want help fixing their credit. Most of the time, these scams say they can fix credit problems quickly and may ask for money upfront for services they never deliver.

Using credit responsibly and making timely payments is important to avoid further damaging credit. This includes keeping credit card balances low and limiting the number of credit inquiries.

The credit repair process after bankruptcy takes time and may take several years to rebuild credit fully. However, by taking the proper steps and maintaining responsible credit habits, you can eventually regain your financial footing and improve your creditworthiness.

Long-Term Positive Effects of Bankruptcy

While bankruptcy is frequently associated with negative consequences, declaring bankruptcy has some advantages.

  • One of the most important advantages of filing for bankruptcy is that it can provide a fresh start by eliminating or reducing unsecured debts such as credit card debts and medical bills.
  • It can also relieve the stress associated with debt collection efforts.
  • While bankruptcy can have a short-term negative impact on credit, it can also help improve your credit score in the long run.
  • Wages earned after filing for bankruptcy are not considered "property of the bankruptcy estate," which means they cannot be garnished to repay creditors for any discharged debt. (Your future earnings may still be vulnerable to undischarged debt, such as child support or earnings committed to a Chapter 13 payment plan.)

The Bottom Line

Filing for bankruptcy can significantly impact your credit score and future financial decisions, which is why working with an experienced bankruptcy attorney is critical.

A knowledgeable attorney can guide you through the process and explain the long-term implications, such as the impact on your credit score and financial future.

Working with a reputable financial advisor or credit counselor can also assist you in rebuilding your credit after bankruptcy, ensuring that you can make sound financial decisions for the foreseeable future.

With proper help you can
  • Lower your monthly payments
  • Reduce credit card interest rates
  • Waive late fees
  • Reduce collection calls
  • Avoid bankruptcy
  • Have only one monthly payment
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