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The Effects of Filing Bankruptcy
and How to Rebuild Your Credit

 

So, you've decided to take the plunge.

After dealing with horrendous debt, resulting from a job loss, unexpected medical bills, or perhaps just some unfortunate business decisions, you've concluded that filing bankruptcy is the only way to dig out from under your financial burden and start fresh. But the question remains: how will this bankruptcy affect your financial life after the debt is erased, and what steps can you take to start rebuilding your credit?

What Effect Will Bankruptcy Have?

First, it is important to understand what effect a bankruptcy will have on your credit rating. Your credit is evaluated independently by three major credit bureaus: Equifax, Trans Union, and Experian. These are not government agencies, but they are required to follow federal law and are governed by the Fair Credit Reporting Act. The credit bureaus gather information about your financial history, including bankruptcies, and use their own mathematical model to rank you as a credit risk. The higher the credit score, the less risk they believe you to be for future creditors.

Among the negative items that can impact a credit score, a bankruptcy is the most devastating, and can remain on your credit report for seven years. The effect of a bankruptcy upon your credit score depends upon whether you have filed a Chapter 7 or Chapter 13 bankruptcy. If you have filed a Chapter 7 bankruptcy, all of your debt will be erased, and your credit will be lowered more substantially. If you have filed a Chapter 13 bankruptcy, your debts will be repaid at a reduced rate, and your credit score will decrease less substantially.

In either case, however, bankruptcies can detrimentally affect your ability to obtain financing in the future. Therefore, it is important to immediately take steps to include positive financial information on your credit report to help reduce the damage caused by the bankruptcy.

How to Rebuild Your Credit

To rebuild your credit after the bankruptcy has concluded do the following:

  1. You must first ensure that, from that point forward, your financial behavior is perfect. All bills must always be paid on time! Bills paid more than 30 days late can be reported to the credit bureaus and lower your credit rating even further.

  2. Do not cause a number of companies (such as cell phone companies, credit card companies, or automobile dealerships) to check your credit by appling for phones, credit cards or new cars within a short period of time. Many credit checks from multiple companies can lower your credit score.

  3. Check your credit reports periodically, and write a letter to the credit bureaus to correct any incorrect negative information that appears on your credit report. Thanks to new legislation, you can now check your credit rating on all three credit bureaus for free once a year! Click Here to find out more.

  4. The next step to rebuilding your credit is to engage in financial behaviors that can improve your credit score. One way to do this is to obtain a credit card with a very low credit limit, and pay it off every single month. Even if your credit has been completely devastated, many department stores and some banks will provide a credit card with a low limit (between $100 and $300) even when you have bad credit or no credit at all. Department stores near college campuses can be expected to have such offers, especially near the beginning of each school year.

    If you obtain such a card, use it occasionally and pay it off completely every single month. This will result in a positive report to the credit bureaus.

A Few Final Words...

Finally, be assured that a bankruptcy won’t haunt your steps forever. Although it will remain on your credit report for several years, it will eventually be removed from your credit report, along with late payments, collections and other negative items. If you prevent new negative items from being added to your credit report, your credit will improve over time and allow you greater financial freedoms.

 
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