Bankruptcy is not the end of the world, but rather a fresh start at a new life. It doesn't even preclude you from getting credit in the future. In fact, filing for bankruptcy can actually improve your credit score if you are seriously behind in your bills.
It does relieve you of burdensome debt that grows exponentially through fees and increased interest rates. Bankruptcy can allow you to recover from an unforeseen event or restructure your lifestyle and spending habits through reduction or elimination of your debts.
How Can Bankruptcy Improve Your Credit Score?
Your credit score is based on several factors. One of the most important factors is your debt-to-income ratio. This determinant compares your total debt with your ability to repay according to your income.
Your debts are likely to vastly exceed your income before filing for bankruptcy. A successful bankruptcy will eliminate all or most of the debts, while you retain the same income level.
This creates a significant improvement in your debt-to-income ratio and provides a boost to your credit score.
How Can You Get Credit After Bankruptcy?
Debt-to-income ratio is an important component of your credit score, but it is not the only determining factor. Your ability and/or willingness to pay your debts on time will also influence your ability to obtain new credit after bankruptcy. However, this obstacle can be surmounted by building a new credit history after bankruptcy.
Reaffirmed debts are those that are based on loans for secured property, such as a house or vehicle loan. You may elect to separate these loans from the bankruptcy filing by signing a reaffirmation agreement.
This agreement allows you to keep making regular payments on secured loans after the bankruptcy case is discharged in order to retain ownership of the property. Reaffirmation agreements allow you to create a new history of making all payments in a timely manner.
Lowered personal debt and an improved credit history will eventually allow you to receive new credit, although it may include sub-prime interest rates and initial fees.
You will have greater success in obtaining new credit for secured property than for credit cards or personal loans. Secured property can be foreclosed upon or otherwise repossessed if you fail to make scheduled payments.
Secured creditors may be more willing to take a risk on a post-bankruptcy credit applicant. There are multi-year waiting periods between bankruptcy filings, so the applicant cannot prevent repossession through a second bankruptcy.
A larger down payment and higher interest rates should be expected for secured loans after bankruptcy. However, debtors can refinance these substandard loans for more favorable terms after timely payments are made in a consistent manner.
You may also consider applying for a secured credit card through a local bank or credit union. Your credit limit will be based on a security deposit that is held by the credit card issuer. These credit cards may carry high fees and interest rates but will allow you to build a new credit history.
How Can Bankruptcy Improve Your Self-Esteem?
Although it may seem counter-intuitive, filing for bankruptcy can actually lift a debtor from a morass of low self-esteem and hopelessness. The stigma attached to bankruptcy is often falsely associated with personal and moral failure.
Notable figures in history have overcome early setbacks through bankruptcy, including ultimately successful businessmen such as Henry Ford and Walt Disney. Presidents Abraham Lincoln and Donald Trump have both overcome financial difficulties through bankruptcy.
A bankruptcy filing provides an automatic stay, which freezes all collection efforts by creditors, and allows a debtor to regroup without threats of repossessions and harassment of bill collectors. The debtor can then decide upon their best course of action to improve their credit.
If you're in the greater Birmingham area and need guidance regarding bankruptcy, contact C. Taylor Crockett, P. C., to help you achieve a new beginning for your credit and your life.