How does bankruptcy affect your credit score? A guide for business owners
Bankruptcy is a major decision for any business owner, and it’s wise to carefully consider all the ramifications before taking that step. One of the most significant concerns for many business owners is the impact bankruptcy will have on their credit score. It’s normal to worry about this. After all, your credit score acts like a financial report card, influencing everything from your ability to secure loans to the interest rates you’ll be offered.
If you don’t know how bankruptcy can affect your credit score, here’s a guide you can read as a business owner:
The impact of bankruptcy on your credit score
Bankruptcy can severely hurt your credit score. It’s a big red flag for lenders, indicating a history of financial difficulty. When you file for bankruptcy, it gets reported to credit bureaus (companies that collect and provide information about your credit history). This information is then included in your credit report, a detailed record of your credit history. The negative mark can stay there for several years, depending on the type of bankruptcy you file:
Chapter 7 bankruptcy
This type of bankruptcy typically stays on your credit report for 10 years. It involves selling off your non-exempt assets to pay creditors. Think of it as a “fresh start,” where most debts are wiped clean, but it comes with a significant hit to your credit score.
Chapter 13 bankruptcy
Chapter 13 bankruptcy usually stays on your credit report for seven years. In this type of bankruptcy, you create a repayment plan to pay back your creditors over a three- to five-year period. It’s often seen as a more “credit-friendly” option as it shows a commitment to paying back debts.
In essence, bankruptcy can damage your creditworthiness and make it difficult to obtain loans or credit cards for several years after the filing. However, it’s important to remember that bankruptcy is not a permanent financial setback.
Once the bankruptcy is discharged, you can start to rebuild credit by establishing new positive credit history. While the process may take time and discipline, it’s possible to regain financial stability and improve your credit score.
How much will your credit score drop?
The amount your credit score drops depends on several factors:
Your credit score before bankruptcy
The higher your credit score before filing for bankruptcy, the bigger the potential drop. This is because a high credit score indicates a strong history of managing credit responsibly. Bankruptcy represents a negative mark on that record. Conversely, if your credit score was already low due to late payments or high credit card balances, the impact of bankruptcy might not be as severe.
The type of bankruptcy you file
Chapter 7 bankruptcy generally has a more negative impact on your credit score compared to Chapter 13. This is because Chapter 7 involves the liquidation of assets. On the contrary, Chapter 13 involves a court-approved repayment plan. This demonstrates your willingness to work towards resolving your debts and potentially increasing your credit score sooner.
The length of time you’ve had your credit lines open
A long credit history with on-time payments is a positive factor in your credit score. Bankruptcy can’t erase this positive history, but it can diminish its overall impact on your score.
If you’ve recently missed payments or maxed out your credit cards, this will also weigh heavily on your credit score regardless of bankruptcy. However, if you’ve been managing your credit responsibly in the lead-up to filing for bankruptcy, the damage might be lessened.
Rebuilding your credit after bankruptcy
Rebuilding your credit after bankruptcy is possible, but it takes time and effort. It’s like climbing a hill. It’s tough, but you can do it. Here are some steps you can take:
Check your credit report for errors
Mistakes happen. It’s crucial to obtain a copy of your credit report from all three major bureaus, such as Experian, Equifax, and TransUnion, and dispute any incorrect information.
Focus on building new credit
Secured credit cards are a great option for rebuilding credit after bankruptcy. They require a security deposit, which becomes your credit limit. Use the card responsibly and make your payments on time. You can also consider getting a small loan from a credit union or community bank. These institutions might be more willing to work with you after bankruptcy.
Become an authorized user on someone else’s credit card
If you have a friend or family member with good credit, ask them to add you as an authorized user on their credit card. This will boost your credit score as long as the cardholder pays their bills on time.
Practice good credit habits
Always pay your bills on time, and keep your credit card balances low. This demonstrates to lenders that you’re a responsible borrower and can be trusted with credit.
With patience and disciplined financial habits, you can steadily rebuild your credit after bankruptcy.
Conclusion
Bankruptcy can be a challenging experience. It’s important to understand how it affects your credit score and business. With dedication and perseverance, you can restore both your credit and your business. Remember, seeking advice from a financial advisor or bankruptcy attorney can help you make informed decisions.
