Bankruptcy affects credit scores negatively. Before filing for Chapter 7 in Austin TX, it is advisable to talk to an Austin bankruptcy lawyer to understand the full extent of bankruptcy on your credit score before you make a final decision.
Generally, your credit score will be lowered by 100 points or more within two to three months. The average debtor will have a 500 to 550 credit score. It may be lower if the debtor already had a bad score before filing.
In summary, your credit score won’t be that great after Chapter 7. Luckily, there are steps for boosting credit scores. Here’s what you should know.
Credit Score After Chapter 7
Individuals who have completed their Chapter 7 bankruptcy cases successfully may have tax debt, child support debt, etc. Such debt results in a lower credit score in the “low 400s region”. When unsecured loans disappear from the credit history of an individual who has successfully filed for Chapter 7, the score can increase. The change will be visible in a few months (3 to 4 months). Coupled with consistent debt repayment going forward, the credit score can rise considerably.
Bankruptcy hits the credit scores of individuals whose scores are in the 680 range or thereabout. Many lenders may stop viewing individuals in this credit score bracket as premium borrowers as their scores crash to 550 or thereabout.
Generally, bankruptcy hits worse when you have higher points. However, a score can be salvaged by regulating unsecured debt to 40% or less and paying off remaining debts promptly.
Reasons Why I Should Bother About My Score After Chapter 7
Credit scores are of utmost importance because they dictate your access to debt and cost of debt. After filling for Chapter 7, your credit score takes a hit and makes it harder to get cheap loans. While it’s always possible to get loans, you are bound to qualify for high-interest loans only.
A low score will also lower your credit limits for unsecured credit cards. You will also have problems renting or buying a home or car using a loan. Most landlords are interested in the credit history of potential tenants. A bad score may make it harder to rent a house or get a mortgage. If you get a home loan, your interest is bound to be high. The same applies to car loans.
You’ll also face stiffer penalties if you fall late on repayments. Your ability to receive large cash deposits and get loans without having a co-signer may also be limited or non-existent. What’s more, your access to credit will also be limited to necessities.
Raising a Credit Score After Chapter 7 Bankruptcy
A bad credit score is detrimental to your financial future, as seen above. Unless you can leave without debt and basic financial services, you should think of raising your score after Chapter 7.
You can raise a credit score after bankruptcy by being strategic about payments. For instance, you need to pay loans on time. Something as simple as timely loan repayments can raise a credit score by 100 to 200 points over time.
If a lender can lengthen the repayment period allowing small loan repayments over a longer time, you can raise your score slowly. However, you need to be cautious of the amount of credit you take on after bankruptcy. While it’s possible to take everything on credit, focus on a 50% debt to improve your score with ease. Excessive debt can worsen the problem.
Frugal spending and consistent repayments go a long way to boosting credit scores after bankruptcy. While there are bound to be changes in a credit score after drastic changes, significant positive changes begin to be evident after a year. If you stick to normal interest loans, it will take 1-2 years to increase a 550 score to 650 or above.
It helps to automate debt repayment. To meet repayments without fail and avoid psychological torture, automate the process using tools like standing orders.
Expect a lower credit score (100 -150 points lower) after Chapter 7. However, you must confirm your score by requesting a free credit report allowed under Federal law. Once you check your score and report, you can dispute errors, if any. Sometimes reports can contain entries with errors. The FTC has a process for disputing credit report errors. A bankruptcy attorney can also assist in the process and other related processes.
Once the errors are removed, you can proceed and start paying existing debt on time. You should take secured credit to boost your score. A secured credit card will help in this process. However, use the card responsibly.
Generally, paying 70% or more of your debt using your card limit monthly will show responsible borrowing habits and raise your score. However, you shouldn’t have multiple cards every few months. Credit cards should also be taken based on affordability. Once you can comfortably work with credit card debt, you can consider larger loans that show a diverse mix of borrowing. If you service such debt responsibly, you shouldn’t have a problem raising your score slowly but steadily.
FAQs About Credit Scores & Chapter 7 Bankruptcy
How Long Will Chapter 7 Stay In My Credit History?
Chapter 7 affects a person’s credit score for a decade. Chapter 13 lasts 7 years.
What Will My Score Be After Chapter 7?
Expect your score to drop 100-150 points after successfully filing for Chapter 7 bankruptcy.
How Will Chapter 7 Affect My Life?
You should expect to have less access to cheap debt. You may also have a problem getting an apartment or some jobs that consider a person’s credit history.
Can I Repair My Credit Score In A Year?
It takes 1-2 years to get your credit score back to good levels. However, this depends on how good you are at repaying existing debt and using credit to boost your score.
Chapter 7 can bring some much-needed relief from debt. However, you can expect a hit on your credit score, which affects many things from your access to debt to the cost of debt and availability of opportunities. To spend the least time and effort rebuilding your credit, seek professional help. Bankruptcy attorneys and financial advisers can help you tackle many issues surrounding bankruptcy and credit scores.
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