The year 2020 has been anything but normal. People who had stellar credit are struggling to pay the bills and put food on the table now thanks to record unemployment. Unfortunately, all of this financial struggle will likely lead to an increase in bankruptcies due to COVID-19. If you are considering that option, here’s what you need to know.
How Bankruptcy Affects Your Credit
There is no doubt about it. Bankruptcy does affect your credit negatively and for several years. However, if you’re truly in a position where you can’t pay your bills, bankruptcy may be your only option. Keep in mind, you’re not the only one going through this. The United States as a whole is seeing an increase in bankruptcies due to COVID-19.
Your Credit Score Will Drop Dramatically
Be prepared that your credit score will drop dramatically, perhaps up to 200 points. Also, it will stay very low for a few years. However, putting this in perspective is important.
Bankruptcy Drops Off Your Credit Report in Seven to 10 Years
Depending on the type of bankruptcy you file for, bankruptcy will drop off your credit score in seven to ten years. Although you may feel that you will have a low credit score forever, that’s not true. Also, a bankruptcy on your credit report may not hinder you for all that time.
You Can Begin Rebuilding Your Credit Immediately
You don’t need to wait seven to 10 years to improve your credit. True, you likely won’t get traditional credit card offers and loans immediately after filing bankruptcy. However, you can get a secured credit card and begin using it responsibly. This will help you to slowly rebuild your credit.
Five Years Out You’ll Be in a Better Position
While your bankruptcy won’t drop off your credit report for seven to 10 years, as you continue to use secure credit responsibly and as you get more distance from the bankruptcy declaration, you should see your credit score slowly improve. Some people are even able to get their credit scores into the 700s again.
When that happens, you’ll find you can again get access to mainstream credit. If you do, make sure to always pay your bills on time and to maintain 30 percent or less credit optimization. As you demonstrate and maintain responsible financial habits, your credit score will continue to increase.
Just a Reminder about Student Loans
Unfortunately, student loan debt is not discharged in bankruptcy. If you owe money on those, you will still need to make your regular payments or face consequences such as having your wages garnished.
Final Thoughts
We’re in difficult financial times as a nation. Unemployment is up, health costs are skyrocketing thanks to COVID-19-related hospitalizations, and there is an increase in bankruptcies. While no one wants to file bankruptcy, many people may have to do that this year. If you’re one of them, know that it is possible to improve your credit and eventually maintain a strong financial position after bankruptcy
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