There are several reasons that people struggling financially may avoid filing for personal bankruptcy. Even though they have to choose what bills to pay or face creditor lawsuits, they try to struggle through their economic hardship because they fear bankruptcy.
Some people worry about the social stigma that comes from filing for bankruptcy. They believe that their community may judge and shun them for failing to take responsibility for their finances. Other people may worry instead about how bankruptcy affects their credit. Most modern households rely on credit to some extent, and so credit-related issues could be a major household setback.
What does bankruptcy typically mean for someone’s credit?
Lines of credit freeze when someone files
The first thing someone needs to understand about bankruptcy is that their filing is likely to immediately alter what credit they have available. Any revolving lines of credit where they can take on more debt are likely to close immediately after they file the bankruptcy. People typically have to manage without credit cards and similar financial instruments until after they complete the bankruptcy process. Credit card offers are often the first opportunity for credit that people have after they complete a bankruptcy. Appropriate use of new cards can help people repair their credit.
Credit scores drop after bankruptcy
The credit score of the filer decreases substantially. People often see a substantial drop, possibly as much as 200 points. Thankfully, people can begin rebuilding their credit almost immediately after their discharges. By responsibly using credit after bankruptcy, people can get their credit scores back to where they were before or to an even better score.
The record of the bankruptcy eventually goes away
A bankruptcy doesn’t haunt someone forever. Instead, it appears on a credit report for a set amount of time after a discharge like any other financial obligation. In a Chapter 7 bankruptcy, the credit report of the filer reflects their bankruptcy discharge for 10 years. A bankruptcy record from a Chapter 13 case is viewable by lenders and other parties for seven years after someone’s discharge.
Those who understand the impact that personal bankruptcy will have on their credit may feel better prepared to begin the bankruptcy process. Recognizing that credit disruptions are temporary can help people feel comfortable with the decision to file.