Many people find themselves in an unexpected set of financial difficulties. Creditors begin to call night and day and letters are coming in from collection agencies. Many people begin to consider bankruptcy a viable option to ease the stress of these issues. Taking that step, however, can have lasting consequences on your credit score. The best thing to do is to consult with an attorney experienced with bankruptcy to see what rights you have before you ever consider filing.

Your credit score will undoubtedly sink after you have filed for bankruptcy. Any debts discharged through filing will not automatically vanish from your credit report, and will continue to negatively affect your score until you take the required steps to repair your damaged credit. There are two types of bankruptcy which you can file, and each will have a distinct effect on your credit score.

Bankruptcy Types: Understand the Variations

When you file Chapter 13 bankruptcy, your financial debts are not absolved. Commonly called reorganization, a Chapter 13 bankruptcy allows you and your creditors to develop a plan for paying off your debts in amounts and in a timeframe that is manageable for you. This type of bankruptcy aids those experiencing short-term financial problems due to extenuating life circumstances, such as a job loss or a serious illness. While filing for a Chapter 13 bankruptcy will damage your credit score and can show up on your credit report for as long as 7 years, it also establishes your willingness to take care of your debts instead of having them discharged. Paying off your debt as a result of filing a Chapter 13 bankruptcy can help you acquire new credit after about a year.

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The other alternative is a Chapter 7 bankruptcy. Chapter 7 will have a much bigger impact on your credit score and is therefore deemed a more serious bankruptcy. In a Chapter 7 filing, the majority of your debts are absolved. Debts that cannot be absolved consist of child support, alimony, and back taxes. This kind of bankruptcy also stays on your credit for ten years. Although you will be able to get a federal student loan following a Chapter 7 bankruptcy, it will be extremely difficult to get any other type of loan for at least two years.

Boost Your Credit Score

Following a bankruptcy, it is important to work on bringing your credit score back up. Directly after the bankruptcy, it can be challenging to get credit. However, two years after a Chapter 7, you may with difficulty get a home loan. A year is the minimum amount of time after a Chapter 13 that you will be able to get a mortgage. Getting a credit card will be very tough, and requirements for each lender will differ.

Once you have had a bankruptcy, you want to try to establish a positive credit history so that lenders can see that you have changed and are prepared to pay back your debts. One great way to do this is to make sure that you pay your bills in a timely manner every month. With that approach, lenders will feel like you have earned a chance. You may have to pay a steeper interest rate. Once you raise your credit score, however, it is easy enough to refinance any credit that you have.

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Most lenders actually only look at the past year or two of your credit record. This gives you the opportunity to rebuild your credit much sooner than you might have thought possible. Be willing to meet the requirements that a lender asks for up front, and you will be well on your way to getting a better credit rating.

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