Whether divorce, job loss, medical reasons or overspending paved your path to debt, many people go through turbulent times with their finances. Some financial burdens are solvable through consolidation or strict budgeting. Others require more drastic measures.
Bankruptcy has become more excepted in recent years. However, many people still find it scary, thinking that bankruptcy will ruin their credit score and borrowing power forever – this is not true, or that the bankruptcy red flag will stay on their credit report for a minimum of 10 years. It’s time to bust these myths.
Myth 1: A positive credit report before bankruptcy will help minimize the credit impact of filing for bankruptcy
Truth: Your positive credit history will do little to hinder the impact of filing for bankruptcy. No matter what, your credit score will significantly downgrade for several years. What will help the impact of a bankruptcy filing is the number of debts you are trying to get discharged and the cost of those debts.
Myth 2: No matter what, bankruptcy will stay on my credit reporting for a minimum of 10 years
Truth: Chapter 7 consumer bankruptcy would stay on the filer’s report for 10 years, but would then fall off. Another consumer bankruptcy option, Chapter 13, would fall off of your credit report after seven years. No form of bankruptcy makes your credit suffer forever.
Myth 3: If bankruptcy is on my credit report, I will have a poor credit score
Truth: Your credit will suffer for seven to 10 years years, but after four or five of making wise credit management moves, your score will begin to increase.
After a few years, it would be wise to explore options, like a secure credit card, or a small installment loan to begin rebuilding your credit. Also, be sure to keep your credit utilization (the amount you spend based on your credit limit) under 30%.
Myth 4: Once my bankruptcy-related debts are paid off, they will fall off my credit report immediately
Truth: Your debts will fall off your credit report, but just as you’ll have to wait seven to 10 years for the bankruptcy filing to disappear, you’ll have to wait the same amount of time for any bankruptcy-related debts to withdraw from your report.
Bankruptcy isn’t just a way to get out of debt; it should lead to a lifestyle change. Sometimes we fall into debt on no fault of our own, but no matter the circumstance, wise money management helps everyone in the long run.