What Are the Long-term Effects of Bankruptcy?

Bankruptcy can be embarrassing and painful, but it can change the course of your life for the better. Many people believe filing for bankruptcy will impact their financial standing forever. There are long-term consequences of filing bankruptcy, but that doesn’t mean you’ll never get a car loan or credit card again.

Though you may be worried for your financial future, thousands of individuals and businesses file for bankruptcy each year. If you’re filing for bankruptcy, you’re not at the end of the road. You’re on your way to a fresh start.

What Happens When You File Bankruptcy? 

Declaring bankruptcy may change your circumstances for a while. If you file Chapter 7, you could lose assets, like cash and possessions, to pay off your debts, but most people do not lose any assets or money. Under Chapter 13, you’ll be able to keep what you have and reduce your debt, but you’ll have to follow a strict repayment plan that lasts from a minimum of three to a maximum of five years.

Filing is a relief—not only because you’ll no longer have debt hanging over your head, but because creditors will no longer try to contact you. Filing for bankruptcy imposes an automatic stay which keeps creditors at bay. It can also stop wage garnishment, home foreclosure and car repossession.

Consequences of Filing for Bankruptcy

Though it will take time to rebuild your credit, the consequences of declaring bankruptcy don’t make it impossible for you to get credit in the future. 

Once you declare bankruptcy, your credit score will feel the effect, dropping by 130 to 200 points. If you need to file bankruptcy, it’s likely that your credit score is already suffering. You can view this moment as a chance to start again. 

Your bankruptcy will remain on your credit report for ten years, and lenders will be more cautious if you’ve recently gone through bankruptcy. However, that doesn’t mean you can’t apply for and receive the following:

  • Credit Cards. It may be more difficult to obtain a credit card after bankruptcy, but it can still be done. A secured credit card is a good place to start. To get a secured credit card, you have to make an initial, refundable deposit. The card issuer can use this deposit as collateral in case you don’t make your payments.
  • Personal loans. Getting a loan may seem daunting after bankruptcy. Lenders may offer you less favorable rates and terms because of your credit history. You may want to start with smaller loans from credit unions. These loans, called credit-builders, let you borrow small amounts with the purpose of paying them off to improve your credit. 
  • Car loans. If you need a new vehicle, you aren’t out of luck. Car loans are secured, meaning a new car can be repossessed if you don’t make your payments. You’ll likely still be able to obtain a car loan since the lender can recover costs if necessary by taking the car.
  • Mortgages. As with other types of loans, your credit history may affect the interest rates you receive on a mortgage. A lender may require you to make a higher down payment or pay higher closing costs. Just know that the consequences of filing bankruptcy lessen over time. It may take two to four years after your discharge to be eligible for a mortgage.

What Should You Do After Filing for Bankruptcy?

After bankruptcy, you need to obtain new credit and rebuild your credit score. You’ll want to get a small line of credit and create a budget that you can follow. You may want to include the dates when bills are due to help you make payments on time. 

Creating a budget is a great way to reevaluate your finances and keep your spending in check. You may opt to go to credit counseling or it may be required of you. A credit counselor can help you create a budget that works for you.

Create A Pattern of Good Credit Use

Much of rebuilding credit is about creating a pattern. You have to use credit and make payments consistently. As the adage goes, you have to use credit to get credit. 

Obtaining a small line of credit to be used sparingly can help you rebuild your credit after bankruptcy. Try a secured credit card or credit-builder loan. The goal is to establish a positive pattern of using credit. 

Auto loan payments are a good way to rebuild credit. You can also use a credit card for costs like your phone bill or online streaming services, which are expenses that you have each month. Whatever you do, remember to use credit consistently and pay off your charges on time and in full. Then, you’ll be on your way to better credit. 

Do you need assistance filing for bankruptcy?

Contact Reynolds & Gold. We’ll offer you the guidance and support you need to navigate bankruptcy. 

A woman sits at her dining room table surrounded by paperwork.