What is Bankruptcy?
In simple words, bankruptcy is a situation in which a person is not able to pay back his or her debts, and is declared insolvent. Mostly, it is imposed by a court, upon some action by a debtor who wishes to collect back his or her debt. The person is announced bankrupt, and the proceedings regarding liabilities and other legal matters are handled in the court of law.
Difference of opinions exists in case of bankruptcy, as some look at it as a way out of financial troubles, while some consider it the biggest problem. One of the major problems associated with bankruptcy is the impact it has on a person’s credit score. People fight debt for years to avoid bankruptcy so that they can keep their credit score at a respectable level.
Explained below is the impact that bankruptcy has on a person’s score. Also, highlighted are the ways to revive your credit score after a bankruptcy.
How does it Impact a Person’s Credit Score?
It is not possible to exactly pinpoint a position in this case, as it differs from person to person. However, a fall in credit score is guaranteed, as a result of a bankruptcy.
In general, the impact depends on your credit history and the information on the credit report. As per a 2010 report published by the FICO, a bankruptcy would cost 240 points for a person with a credit score of 780. It was explained using a mock scenario, which gives a better picture, but it is again based on estimates and hunches.
Bankruptcy in one way protects a person too, as the history of bad payment, at the time of bankruptcy discharge, is cleared, and the individual has a credit score clear of late payments associated with the bankruptcy.
However, it must be remembered that not all bankruptcies are the same. There are two bankruptcies in case of a personal debt: Chapter 7 and Chapter 13 bankruptcies. The difference is mainly between the times taken to discharge them completely.
How to Revive the Credit Score after Bankruptcy?
With a little patience and knowledge, you can easily handle bankruptcy. It indeed looks like the worst-case scenario, but with a little attention it can easily get done with. Given below are some simple tips on handling and reviving your credit score after a bankruptcy:
– Pay attention to everything and choose a secured credit card. As the name suggests, secured credit cards keep a person secure, as your expenses are counted against money that you deposit with the lender. This way, you will not go in debt. It is like a debit card, which can be used initially to prepare you for a credit card. Once you are used to handling your money properly, you can convert to an unsecured credit card.
– Remember to always spend wisely. This is the main thing, as your credit score is impacted by the debt you incur. When you get a credit card again, it will take you some time to build up a respectable credit balance, which is not possible until you control your expenses. You can put a maximum limit on the credit you use, depending on your income and other factors.
– You must choose a lender with care, as you will have to deal with the lender on a regular basis. Your credit score also depends on the lender, as it is the lender’s responsibility to report payments to the credit bureau that handles the credit score system. You must choose a lender that keeps you updated regarding your credit score and sends timely information to the concerned departments.
– You must have learnt something from your earlier experience. It is now time to use the knowledge gathered. It is obvious that a person gets in trouble when s/he fails to payback the debt on time. If you don’t pay your debt on time, you will risk your credit score again. Remember, paying your bills on time adds points to your credit score, which is very important in such a scenario. To be on the safe side, you can set automatic payments, so that you don’t have to worry about your bills getting cleared every month.
– Lastly, save something for the rainy days, so that if an emergency situation arises, you will be prepared to face it. Remember to avoid debts that require heavy interest rate, even if you find the advertisement cajoling. Lastly, keep an eye on your credit score, and reconcile your statements at regular intervals.