3 mins read
12-Sept-2024
Filing for bankruptcy can have a significant and long-lasting impact on your credit score. Depending on your financial situation, declaring bankruptcy can lower your score by as much as 200 points. This impact is especially pronounced if you had a high credit score before filing. Bankruptcy remains on your credit report for up to 10 years, making it more difficult to obtain new credit. Even if you are approved for credit, you are likely to face higher interest rates and less favourable terms.
Chapter 7 bankruptcy: Often referred to as liquidation bankruptcy, this process involves selling some of your assets to repay creditors. Essential items, such as a vehicle or basic household furnishings, may be exempt. Once the bankruptcy is processed, which usually takes four to six months, the remaining debts are discharged.
Chapter 13 bankruptcy: This type allows for the reorganization of your debts, with a repayment plan typically lasting three to five years. Once the repayment plan is successfully completed, any remaining debts are discharged, allowing you to regain financial stability.
After filing for bankruptcy, obtaining new credit becomes more challenging. Most lenders will not approve credit applications until your bankruptcy is discharged. Even after that, you are likely to encounter higher interest rates and less favourable loan terms.
How does filing bankruptcy work?
Bankruptcy is a legal process that provides relief for individuals who are unable to repay their debts. Due to its complexity, it is advisable to seek legal assistance. Depending on your financial circumstances, you may file for either Chapter 7 or Chapter 13 bankruptcy:Chapter 7 bankruptcy: Often referred to as liquidation bankruptcy, this process involves selling some of your assets to repay creditors. Essential items, such as a vehicle or basic household furnishings, may be exempt. Once the bankruptcy is processed, which usually takes four to six months, the remaining debts are discharged.
Chapter 13 bankruptcy: This type allows for the reorganization of your debts, with a repayment plan typically lasting three to five years. Once the repayment plan is successfully completed, any remaining debts are discharged, allowing you to regain financial stability.
What happens to your credit when you file for bankruptcy?
Filing for bankruptcy can significantly damage your credit score, particularly because your payment history is the most important factor in determining your CIBIL Score. The exact impact will vary depending on your credit profile before filing. If your credit score was already low due to missed payments, repossessions, or accounts in collections, the additional impact of bankruptcy may be minimal. However, if your credit was in good standing, bankruptcy can result in a more dramatic decrease.After filing for bankruptcy, obtaining new credit becomes more challenging. Most lenders will not approve credit applications until your bankruptcy is discharged. Even after that, you are likely to encounter higher interest rates and less favourable loan terms.
