Recovering From the Long-Term Financial Effects of Filing for Bankruptcy

Going through bankruptcy is a stressful proposition, to say the least. However, for most people, the real anxiety lies not in the bankruptcy process itself, but rather in the fear of the unknown about what happens next. Will they be forever branded as being financially irresponsible? Will they ever be able to get a car loan? A mortgage?

If you're considering bankruptcy but you're concerned about the potential future implications, don't despair. You are not alone in your fears. The good news though is that the long-term consequences of filing for bankruptcy are not nearly as severe as most people think they are. With some hard work and good financial management, you can be back on the road to fiscal health sooner than you might expect.

How Does Bankruptcy Affect Credit?

Filing for bankruptcy does have a huge effect on a person's credit score. Although the exact impact is different in each individual case, it is not rare for a bankruptcy filing to cause a person's credit score to fall by between 130 and 350 points. By comparison, a foreclosure usually causes an 80- to 170-point hit.

In addition, a bankruptcy stays on a credit report for between seven and 10 years. Even if the person's credit score improves, potential lenders will be able to see that he or she filed for bankruptcy.

What effect this has depends on why the bankruptcy happened. Nearly all filers will have short-term difficulties qualifying for favorable terms on credit cards, auto loans and mortgages. However, those who have what lenders see as "good reasons" for filing for bankruptcy - like unexpected illness, divorce or breadwinner death - may begin to qualify for good rates after a year or two. This is especially true if the person has made a good faith effort to get his or her financial matters back on track.

Improving Credit After Bankruptcy

No matter what led to your bankruptcy filing, it will take diligent work to get your credit back to where you want it. There is no easy fix - you will likely need to spend months, or maybe even years, in a deliberate effort to improve your credit score.

Ultimately, the steady passage of time is the best cure for damaged credit. However, some steps can help speed the process. Most experts recommend starting with the following tips:

  • Stick to a budget: Don't spend more than you make, and put money aside in a savings account each month. That way, you won't have to turn to credit if an unexpected expense arises.
  • Pay your bills on time: This is especially true for credit-card bills and loan payments. Even one late payment can take a big chunk out of your credit score.
  • Use credit wisely: It may seem confusing, but you have to use credit to fix your credit. If you don't have a credit card, open a new one. Then charge a small amount each month, being sure to pay the bill in full. Keeping this pattern up over time will prove your creditworthiness.
  • Open and close with caution: Both applying for new credit and closing existing credit accounts can damage your credit score. Only apply for credit you really need. If you're trying to avoid using an existing account, it may be better to cut up the card than to close the account altogether.

These are just a few of the tips you should know as you recover from bankruptcy. However, because every case is different, it is always a good idea to talk to your bankruptcy attorney if you have specific questions.