Financial stability is a delicate balance that many people aim for. Unexpected hurdles, however, do happen, and they disrupt even the best-laid plans. One such challenge is bankruptcy. It is a process that allows individuals or businesses to restructure their debts while being protected by the court.
Learn about bankruptcy in this blog. While bankruptcy can be a lifeline for those in financial distress, its effects on credit ratings can be severe. Let’s go over the complex relationship between bankruptcy and credit scores.
The Basics of Bankruptcy
Bankruptcy is not a blanket solution. The effects on credit scores will differ based on the type of bankruptcy filed. Instead of Nathaniel Hawthorne’s A in The Scarlet Letter, this is a B that spells the inability of a borrower to pay debts responsibly. The two most common bankruptcies for individuals are Chapter 7 and Chapter 13.
- Chapter 7 Bankruptcy – This entails the sale of a debtor's non-exempt assets to repay creditors. Some qualified obligations may be discharged. Chapter 7 remains on the credit report for ten years.
- Chapter 13 bankruptcy – This court-approved repayment plan allows debtors to keep their assets while paying off their debts over three to five years. Chapter 13 stays on the credit report for seven years.
Impact of Bankruptcy on Credit Score
In Baltimore bankruptcy blogs, it is stated that filing for bankruptcy will surely harm a person's credit score. The said rating can decrease by 100 to 200 points or more, depending on where the original score was. This drop will make it difficult to get new loans or lines of credit in the immediate future.
Bankruptcy raises red flags for lenders. It indicates a borrower’s history of mishandling finances and sends the person into the subprime zone. In this situation, obtaining credit becomes a Herculean task, and if ever approved, it’s likely to come with an excessive interest rate.
Rebuilding Your Credit
The repercussions of bankruptcy will echo in credit reports and haunt for years. Nevertheless, it can be solved. Rising from it requires patience and strategic financial planning. This recovery relies on living on a realistic budget (minus unnecessary expenses), having a secured credit card (an effective tool for rebuilding financial status), and timely payments (a must). Credit restoration is difficult, but not impossible.
Remember to diversify the types of credit you are using. When you already can, go into installment loans and revolving credit. These financial arrangements can positively influence credit scores. Manage them responsibly and avoid getting into more debt.
Legal Counsel for a Financial Crisis
If you must learn about bankruptcy, know this: bankruptcy may appear to be a financial dead-end but it’s critical to view the process as a means to a fresh start. With professional counsel who can bring awareness of how things can be turned around, you’ll emerge from this wiser and on track to recovery.
If you need assistance, call Richard Hackerman. He’s both a tax lawyer and a bankruptcy attorney. You can call us at 410-243-8800 or 888-243-6600.
