What is bankruptcy?
Bankruptcy is a legal term used for a state when a person or a business is unable to pay off its debts. The liabilities are higher but there aren’t sources of cash or income to pay off these liabilities. Bankruptcy is either declared by the debtor himself, which is very common and is a voluntary bankruptcy. This is referred to as a debtor’s petition. In some cases, a petition is filed on behalf of the creditors, which is rare and is referred to as creditor’s petition. Once a person declares bankruptcy, he/she is assigned a trustee who takes care of and manages the bankruptcy. A detail of debts, income, and assets is provided to the trustee by the debtor. The trustee then informs everyone, of the bankruptcy to prevent creditors from asking for money. The trustee can also help to sell some assets to pay off some debt.
Bankruptcy and credit score
The stamp of bankruptcy can stay on a credit report for more than ten years ending up having a detrimental effect on your credit. It seriously damages your credit score. Due to a low credit score, bankruptcy can make it really difficult for you to take a loan for a house or a car or even get credit cards. It takes time to improve credit score once it has seen a downfall but if an individual manages his/her current debts properly, then this bad past can be overshadowed by the recent good performance. The duration a bankruptcy stays on the report depends on the type of currency but usually, it ranges from seven to ten years. The debts discharged are also mentioned in the report. As the item, on the report, associated with bankruptcy starts getting old, their effect on credit score also starts fading.
Managing Credit Score after bankruptcy
Keep checking your credit score. If all the debts have been discharged after bankruptcy then they should add a value of zero on the report. If items on the credit report aren’t correct, one should ask the issuer to recalculate and change.
Re-establish credit history by applying for credit as soon as considered bankrupt. This is to improve history and rebuild credit score. Buying a car loan is easier to get and can be effective in increasing the credit score once a significant down payment is made.
Filing for bankruptcy protection
In simple terms, bankruptcy protection is a change given to an individual or company to restructure the debt that they owe to their creditors. The government, under this protection, helps the entity financially to pay off the debt in order move forward and run its business. In some cases, when an individual applies for a bankruptcy protection, their debt is finished. The means the creditors will not be allowed to get back any of the debt owed previously. In other cases debt gets a restructuring, which means the amount of debt owed is reduced, and also sometimes in terms of repayments are changed to assist the entity.
There are different types of bankruptcy protection and can be used according to suitable situations. For instance, there is one bankruptcy protection that allows the liquidation of assets of the debtor and pays off all their debts. There is another that is filed by businesses that allow the entity to keep running its operations while simultaneously organizing their finance and improving their financial position.
Things one should keep in mind before declaring bankruptcy
Take advice from a counselor
It is important to seek advice from a counselor or a lawyer before declaring yourself bankrupt. They can help find a way to deal with debt you have failed to manage and can also guide you further in handling your debt.
Other available options
Seek for other available options like 21-day relief or debt agreements. You can also negotiate with the creditors or agree to some terms regarding debt repayment.
Bad consequences of Bankruptcy
Bankruptcy can damage a company’s or an individual’s reputation. It can also cause a fall in the credit score. It is hard for a company or an individual to restart, all over again with a bad repute. Creditors might refuse to fund money at all considering the past associated with that company or individual.
Conclusion
Bankruptcy will eventually drop from the credit report but it’s important to rebuild a credit score as soon as it leaves a mark. If a bad score is due to missed payments of multiple debts or reduced limits, the effects of the bankruptcy filing on the credit report will be less detrimental than remaining in the current situation. So, it is important to rebuild your value through a higher credit score, as soon as possible.