If you are drowning in debt and it seems like you can’t get ahead, bankruptcy may be a tempting option. But before you start down the path of bankruptcy, it is important to understand how bankruptcy harms your credit and the long-term ramifications. It takes a full decade to clean up your credit from a bankruptcy, if not more. Let’s take a look at how bankruptcy ruins your credit and how you may be able to avoid it.
What bankruptcy does to your credit
Bankruptcy is a court procedure for people and businesses who can’t repay their debts. Typically bankruptcy is a last resort for borrowers who have far more debt than they can repay. Bankruptcy can impact credit card debt, medical collections, and other amounts owed.
When someone files for bankruptcy, they typically need a lawyer (not inexpensive) to guide them through the slow bankruptcy and debt discharge process. But while bankruptcy may lower your debt load today, it has huge ramifications for your credit. It is also important to note that in nearly all cases, bankruptcy will not affect student loan balances.
Bankruptcy will likely drop your credit score by at least 100 points, and it takes a full 10-years before a bankruptcy is removed from your credit report. This may prevent you from getting approved for new credit cards, mortgages, and other loans. And if you do get approved, you will likely pay a far higher interest rate than those who don’t have a bankruptcy on their credit report.
A bankruptcy is a public record, a section on your credit report. In most cases, if you are facing bankruptcy your credit score has likely already taken a bit of a beating. But most negative on your credit report goes away in seven years outside of the dreaded bankruptcy.