Mitigating Damage to Credit After Filing for Bankruptcy

With the nation’s economy lingering in the doldrums, more people view bankruptcy as the only option to resolve the difficult economic situations in which they find themselves. In New Jersey alone, 40,369 people filed bankruptcy in 2010, making the state ninth in per capita increases in bankruptcy filings for the year. Making the decision to file bankruptcy is a big step, since the effects of filing bankruptcy reverberate for years after the debtor receives his or her discharge in bankruptcy. However, by taking proper steps after bankruptcy, filers can lessen the damage to their credit score.

How Bankruptcy Impacts Credit Score

A bankruptcy filing can lower a person’s credit score by anywhere from 50 to 300 points. The bankruptcy remains on a person’s credit report for up to 10 years, although some credit reporting agencies will remove it after seven.

While the seven-year period is the same amount of time that a delinquent account remains on a credit report, some lenders tend to view filing for bankruptcy with more disfavor than a delinquent account. However, the effect of bankruptcy on a credit report is similar to that of a home foreclosure or vehicle repossession. It may be more difficult to get a home mortgage or insurance soon after filing a bankruptcy. Additionally, lenders may charge higher interest rates to those who have a bankruptcy on their credit report to compensate for the perceived added risk they are taking.

Rebuilding Credit After Bankruptcy

People who file bankruptcy can take steps to restore their credit. One method people use to begin repairing their credit is to get a limited amount of credit and make timely payments. A common way of doing this is by using a secured credit card, a type of card with a low credit limit that requires the borrower to deposit an amount of money equal to the credit limit in a bank account. Prompt payments on this type of card show lenders that a person is a low-risk borrower and improves the borrower’s credit score. Another method is to make sure that your mortgage, vehicle and utility payments are made on time.

Another important tool in restoring credit after bankruptcy is a credit report. It is critical that people who have filed bankruptcy monitor their credit reports to ensure that the information is accurate. They need to check to see that accounts that were not included in the bankruptcy filing are not listed as being part of the bankruptcy on their reports. Also, people need to be proactive in ensuring that the bankruptcy is removed from their credit reports as soon as they are eligible to do so.

Through diligence and effort, the effect of filing bankruptcy on a person’s credit will decrease with time, until it fades completely.