Many people worry about what will happen to their credit in bankruptcy. Actually, any credit damage that may result has already been done long before a person files for bankruptcy. Missed payments and delinquent account statuses are what cause credit damage, both of which are highly common in bankruptcy filers. While bankruptcy itself does not damage credit, there are some things to be aware of in order to ensure the best chance of rebuilding credit after a discharge.
Credit In Bankruptcy
There is not much for a person to do with their credit while in the middle of a bankruptcy case except for monitor their credit report. When a person files for bankruptcy, an automatic stay order is issued to prevent further collections on accounts. This order essentially freezes financial standings and credit reporting activity. Any changes that occur to a credit report during bankruptcy should be reported to the court or an attorney. This could be an indication of creditors violating the order and lead to corrective action.
Credit After Bankruptcy
It isn’t uncommon for most people to see an immediate improvement in their credit standing after a bankruptcy discharge. Once debts are resolved in bankruptcy, delinquent account standings are removed and negative payment histories are erased. With this information eliminated from a credit report, the score is likely to see some level of improvement. However, checking one’s credit report for updated information following a discharge is very important. The credit report should reflect the debt discharge and show accounts as being “current” or “satisfied”.
Getting new credit after a bankruptcy is the best way to begin to rebuild a credit history. There are two options for securing new credit after bankruptcy: (1) an unsecured line of credit that has a higher spending limit and better terms or (2) a secured line of credit with a lower limit and less favorable terms. Either of these options may be considered, but they each come with additional considerations.
In general, unsecured lines of credit are a better option right out of bankruptcy. They are less risky than secured lines of credit as they do not require any collateral against the loan. Unsecured lines of credit are also easier to obtain and carry more favorable terms than a secured line of credit. Because the goal of post-bankruptcy credit is strong and responsible spending, an unsecured line can allow a person to receive a higher limit and lower interest rate. The most important aspect is to accumulate manageable debt burdens that can be repaid in a consistent manner.
Secured credit lines tend to be more risky after a bankruptcy because they require collateral. Defaulting on a secured line of credit leads to steeper consequences, including asset loss. Also, secured credit lines carry less favorable terms such as high interest rates. Anyone obtaining a secured line of credit after bankruptcy needs to remember the importance of staying out of default on their loan.