Those who consider filing for bankruptcy often worry about their credit score and whether they will be able to get loans in the future.
After all, as Americans, credit is just a way of life. We take out mortgages to buy homes. We take out loans on new and used vehicles. We use credit cards to buy groceries or gasoline. If you cannot get any loans, credit cards or lines of credit after declaring bankruptcy, is that worse than being in debt? It's a common fear that people have.
What you need to know is that it is very possible to rebuild your credit after you file for bankruptcy. It does take time and work. But it is possible.
For instance, you may start out by getting secured credit cards. You need to save up money for the deposit and then put it down against the balance on the card. Essentially, you pay up front. If you put $500 down, then you have a $500 line of credit on that card.
What is the benefit of using the card instead of just spending the cash? With the down payment, you can then take out money on the card and pay it off at the end of the month, just as you would with a normal card. By paying off your monthly bill, you prove to lenders that you have learned how to manage money, and your credit score goes up with the successful reports.
The secured card is not your end goal. You just want to use it to build credit until you can get traditional cards, then you can use those to keep working on your credit score as you work toward mortgages, car loans and other high-value loans.
In one important way, declaring bankruptcy may also make you look like a better risk to a lender right away. This does not fix your credit score, but it can help you start down the path described above.
The key lies in the fact that you cannot use Chapter 7 bankruptcy again until eight years go by. So, while the lenders you previously owed money to may have lost some of that money during the liquidation bankruptcy, other lenders know that you cannot use bankruptcy twice in a row. Nearly a decade has to go by. You cannot rack up debt and then declare bankruptcy again just to get rid of it.
On top of that, they also know that you're coming into the new situation without any remaining debt. You just eliminated all of it. While there are exceptions to this rule -- taxes and student loans, for instance, which you cannot typically discharge -- you may be completely debt-free.
If you are, that certainly increases the odds you can afford to pay back your new loans. Your financial situation appears more stable to prospective lenders.
2 sides to bankruptcy
As you can see, there are clearly two sides to bankruptcy. It can actually help you in many ways that you may not have considered before. Make sure you fully understand all of the legal options you have moving forward.