When people think of bankruptcy benefits, they usually think of getting rid of debts and getting out of financial trouble. What many people are not aware of is that there is actually another benefit associated with filing for bankruptcy protection: you can start rebuilding your credit score.
It is a common misconception that bankruptcy will ruin your credit or make it impossible for you to do things like obtain a mortgage or car loan. This is actually a pervasive and damaging myth because it prevents people from filing for bankruptcy when they should.
While bankruptcy does have a short-term negative impact on your credit score, it will actually improve your credit over the long-haul.
Why Rebuilding Credit is Part of Your Bankruptcy Benefits
Rebuilding credit is an unexpected bankruptcy benefit because filing for bankruptcy protection allows you to put an end to creditors making negative reports to the credit bureaus.
Creditors report to Equifax, Experian, and TransUnion when you are late making payments. Creditors alert the credit reporting agencies if you are 30 days late, 60 days late, and 90 days late. If a debt is charged off (they’ve given up on collecting), they will notify credit reporting agencies of this too.
When you are in debt trouble and you cannot repay the money you owe, you may have multiple credit accounts that you fall behind on. All of these creditors are going to start reporting late payments each and every month when you do not send payments due. This record of late payments starts to go on your credit report, which is a big problem because payment history is one of the most important factors in determining your credit score.
Creditors may start to pursue court judgments against you if you’re late on paying. You can end up with judgments on your record, which will also show up on credit reports. The longer you remain in debt to multiple creditors, the more likely it is that you will get multiple judgments against you.
All of these things hurt your credit, and keep happening until you get out of debt trouble. Bankruptcy can be the answer to get you out of your financial mess. When you file, you discharge debts with chapter 7, or enter into a payment plan and then discharge debts with Chapter 13. With no more debt, there’s no more negative information to post.
Secured card offers will begin coming quickly after a bankruptcy has been completed. You can get a credit card right away — usually one with high fees and high interest rates– and you can make small charges and pay it off. You’ll build a positive payment history, instead of a negative one. Within just a few short years, you should have an improved credit score and you will no longer have unpaid bills to worry about so you can make better financial choices in the future. Your bankruptcy will have made the improved credit score possible.