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People often view personal bankruptcy as a sort of nuclear bomb that will destroy their financial future. They think that if they go through bankruptcy, they will never be able to do things such as buy a car, buy a house or take out any significant line of credit for at least seven years (if not ten) — the amount of time negative items remain on the report.
However, this isn’t always the case. While personal bankruptcy is definitely a last resort when one has hit financial bottom, it’s also important to remember that people as wealthy as Donald Trump have gone through it. So it’s definitely not the end of the road. Knowing how bankruptcy can affect your credit score, though, is important when making financial decisions.
How Much Does Bankruptcy Affect Credit Score
Here’s the deal, though — it can be tough — or even impossible — to predict the exact plunge that your credit score will take if you have to declare bankruptcy. The overall impact on credit score varies with current credit and the other information that is already on your credit report. In 2010, FICO came out with a report about how credit mistakes such as bankruptcy influence one’s credit score. They put together several mock situations with people at different people on the credit spectrum. Someone whose current credit score is 780 could lose 240 points with a bankruptcy, while someone with a 680 score could lose 150. This means that afterward, the two people would have scores of 540 and 530, respectively. If people are already in the 500 range because of credit problems, there is less of a decrease to expect.
However, those are just hypotheticals. The hard part is that you don’t actually know what will happen until you file, which makes the decision process even more difficult. There are some alternatives to bankruptcy, such as entering a debt payment and relief scenario. This can involve paying things off yourself, consolidating debts, using a credit counseling program to start a debt management program or entering settlements with creditors. While filing bankruptcy might hurt your credit score more than the other options, it might be the best choice if your resources for repaying debts are limited. The other three options might not influence your score at all, but they may not be available to you with the resources that you have and the status of the accounts.
People who decide to file bankruptcy aren’t going to have their credit ruined forever. After you get your finances back together, you can start rebuilding your credit score. This includes making a positive history of payments with new creditors as well as any accounts that made it through the bankruptcy. Once you start building that history, the number of credit card applications that start showing up in your mailbox will surprise you. It is possible to make it all the way back to an excellent credit history eventually, but it does take time.
But what if you don’t want to wait 10 years to buy a house after you go through bankruptcy? If you’ve put your finances back together and have started to bank some savings, there is a shorter way to do it — through private lending. Here’s how this works. If you have at least 15 percent available to put down on a house, you may be able to take advantage of Amansad Financial’s network of private lenders. These are organizations and individuals who want to make money from the real estate market by funding mortgages.
The downside of a private mortgage is that the interest rate is going to be higher than a bank loan would be. However, the private lender is taking on risk that a bank won’t touch, and interest rates have to reflect that decision. The upside, of course, is that you get to go ahead and move into that house you’ve always wanted. While the term of a private loan is generally short (one to two years at the most), some offer the option to renew, and if your credit score hasn’t revived enough to qualify for bank financing by the end of the term, you can take the equity you’ve built up and apply it as a down payment for another private loan to extend your mortgage if the private lender for your first loan isn’t offering renewal. For people who went through bankruptcy, this is a faster way to get back into home ownership.
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