Bankruptcy is a fairly complicated process, and some people find more trouble than others in handling the process. This can be due to a variety of factors, including a lack of experience and knowledge involved, or even just your specific bankruptcy incident being a more complicated and nuanced issue than others. Being that people looking to file bankruptcy almost certainly have financial struggles that they are dealing with, one question that comes up quite a lot is just how bankruptcy relates to a person’s credit score. Particularly, whether bankruptcy can be used as a tool to improve one’s credit score.
How does filing bankruptcy affect my credit score?
Improving your credit score is important, but the fact of the matter is that if you file bankruptcy, it is going to reflect very poorly on your credit record, unfortunately. The reason for this is simple: if you file for bankruptcy, the first thing that lenders are going to take away from that fact is that you are irresponsible with your money. This is not necessarily the case, of course, as not all bankruptcy cases happen for the same reason. Some people file bankruptcy only because they got unlucky, or because they got taken advantage of by someone. But to lenders, it is all the same song and dance to them. This will, in turn, make future lenders a lot more wary to lend to you, although to be fair, this is not a death sentence, as one can do work to improve their credit score following the bankruptcy filing. So if you are worried about your credit score, the first thing you should do is determine whether bankruptcy is the only option you have available to you. The key takeaway from this is that you simply should not file bankruptcy unless there is no other option at hand.
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How does filing bankruptcy even work?
Bankruptcy is a legal process where, in response to having accumulated so much debt that it is not reasonably feasible that you can pay it all back, you can try to have it dissolved. The process is essentially there so that you can get a second lease on life and not have to have the debt weighing you down. After all, life is all about second chances, and finances should not be an exception to that rule. Mind you, just because you have this opportunity does not mean that there will not be consequences for filing bankruptcy, as is mentioned above. Due to bankruptcy being such a complex system, it is paramount that you hire an experienced bankruptcy lawyer to help represent you in these things. At this point, your bankruptcy lawyer will help you decide which type of bankruptcy is the right fit for your situation. The options come down to two: chapter 7 bankruptcy and chapter 13 bankruptcy.
Chapter 7 bankruptcy, to boil it down to the basics, is the road that one would take if they are aiming to have a clean slate, financially speaking, as far as you go with your debts. This process will have a court trustee appointed to supervise the sale of certain assets that are not covered by the exceptions under chapter 7 bankruptcy. These exceptions come in the form of assets that a person would need. For instance, being that people in general need a car in order to get to and from their job to make money. The last thing that does anyone good is for people to be unable to earn money, leading to them getting back into the mess that they just got out of. There are other assets that may qualify, on which Jacksonville bankruptcy lawyers can help elucidate you. Chapter 7 bankruptcy has a lot of appeal to it compared to chapter 13 bankruptcy due to how it wipes out your debt, in order to actually qualify for Chapter 7 bankruptcy, you need to first go through a means test. Not only that, even if you do pass the means test, you still have to accept that you may lose out on important assets from this option.
Chapter 13, on the other hand, is not so much about wiping out your debts. Instead, it is more about reorganizing your debts in such a way that it becomes easier for you to handle than before. This is done by setting up a payment plan, which is typically paid off over either a span of three years or five years. Over these spans of time, you will be expected to pay back some or all of what you owe. This is a good option in the event that you believe that you can pull it off. Chapter 13 helps a lot for those who are not in such dire financial straits, as it can allow you to have more time to pay off your debts, but still help lift the burden off of your shoulders in the process. You will not have to lose out on your assets like you do with chapter 7, but it will be a longer, harder process that you have to be mindful of. A bankruptcy attorney can help guide you through the process, such that you are more prepared to make your choice between chapter 7 and chapter 13 bankruptcy.
If you wind up having to go with either chapter 7 or chapter 13 bankruptcy, the best approach to help your credit is to simply rebuild your credit from the ground up. A bankruptcy will remain on your credit score anywhere from 7 to 10 years, and during that entire time, you can build it back up. This can be accomplished through a variety of methods, one of which is as simple as keeping an eye on your credit score. Watch every single fluctuation, even the smallest. You should always ensure that you pay all of your bills right away. If you let them slip through your fingers, you are liable to see your credit tank and spiral out of control. One of the best ways to ensure that you can do this is to stick to a budget. This does not mean that you have to spend absolutely no money on non-essentials, but you definitely need to keep them to the minimum that you reasonably can. You may be well-advised to look into a secured credit card, which works a lot like a regular credit card, except that you have to load it with a security deposit as collateral. In doing this, and doing it responsibly, you can set up a positive record on your credit report.