Bankruptcy or “BK” as it is commonly referred to, no longer carries the stigma that it once did. 

Things occur in our lives that are unforeseen, yet they can impact us both personally and professionally. Covid-19 is just one such notable example as many people have reduced incomes, been furloughed or have lost their jobs altogether.

If you find yourself in a tough financial situation with bills are piling up and seemingly no way to pay them, bankruptcy may be your best solution. However, it should be considered as a last resort as it will cause severe damage to your credit score, and therefore, your ability to use credit. On average, you can expect your good credit score to drop by at least 200 points.

So while a bankruptcy filing will clearly impact you as a consumer, it does not have to be a “life-changing” event. Such a blemish on credit reports will only last a maximum of 10 years (and usually more like seven) and after that, you are free and clear of any negative financial history.

Given the negatives, what’s the upside of filing for bankruptcy?

Yes, filing for bankruptcy is a major decision; however, it may be the best one for people in dire financial straits. It can help you liquidate assets, discard or pay off debts and in general, just get some financial relief.  That’s why it is called bankruptcy protection, as it keeps your creditors at bay. The only debt that isn’t forgiven in bankruptcy is federal student loans as they must still be repaid.

There are several different types of bankruptcy filings (7, 11 and 13) and again, most will only stay on your credit report for seven years. Only ‘Chapter 7’ lasts for 10 years. Of course a bankruptcy attorney should always be consulted before filing for any such protection from creditors, and for advice on which filing classification makes the best sense for you.  

The good news is that you can begin to build up your credit score even while you remain under bankruptcy protection. This can happen with smart credit management which involved doing the following:

  • Apply for new credit, such as secured cards or small secured loans. These require an upfront security deposit
  • For new and existing credit, make all debt payments on or ahead of time
  • Keep all credit card balances as low as possible; best if just 30 percent of the credit limit
  • Regularly check  your credit report to watch for any errors

Following bankruptcy, your credit score should really begin to rise if you continue to do these things and avoid any late payments.  Most people who have experienced bankruptcy have learned to become cash buyers and avoid using credit altogether, excluding of course, for their home mortgage.

Once again, filing for bankruptcy is a serious matter so before making such a decision, meet with a bankruptcy attorney to consider all your options and the consequences.  And after your bankruptcy is over, know your credit score and keep watch for errors. You are allowed one free credit report from each of the three credit bureaus once a year.