Will Bankruptcy Destroy My Credit Forever? Debunking The Myths

There is a lot of information flying around about what bankruptcy can do to your credit score. And you are probably wondering which ones are true and which ones aren’t. So, today, let’s debunk some common myths about bankruptcy and credit to help you make an informed decision and find out if bankruptcy will destroy credit forever.

First of all, the term bankruptcy refers to a legal tool that individuals and businesses who can no longer pay back their debts adopt. Bankruptcy allows you to take a break from debt and start afresh. But this comes with some consequences, especially for your credit score. 

Let’s see what is true and what’s not about declaring bankruptcy and how it affects your credit score.

Debunking bankruptcy and credit score myths

Myth 1: The only option when you have a lot of debt to pay is to declare bankruptcy

Truth: Bankruptcy doesn’t have to be your first move. Think of it as a last resort. Before you take that step, consider other paths like a debt management plan or debt settlement. With a debt management plan, you can merge your various loans into one, making your monthly bills easier to handle and often reducing your interest rates. As for debt settlement, it’s about having a conversation with your creditors to see if they would agree to forgive part of what you owe. If you manage to negotiate successfully, you could significantly lower the amount you need to pay back.

Myth 2: Once I declare bankruptcy, all my debts will be cleared

Truth: A lot of people think that filing for bankruptcy wipes out all their debts, but that’s not quite true. While it can clear a lot of your debt, some obligations usually don’t go away. This includes things like most student loans, alimony, child support, and some taxes. So, it’s crucial to know that declaring bankruptcy doesn’t mean you’ll start completely fresh financially.

Myth 3: As long as your bankruptcy information remains on your credit report, you will always have poor credit

Truth: Filing for bankruptcy will likely cause your credit score to drop significantly, but you can start to rebuild it with careful credit management. Within four to five years, you might even reach a good credit score range. Learning how to rebuild credit after bankruptcy is key.

Myth 4: You can no longer get a loan or a credit card once you declare bankruptcy

Truth: Credit cards can be a powerful ally in rebuilding your credit, even if your credit history isn’t spotless. With that said, you can go for secured credit cards—they require an initial deposit but function just like regular credit cards, helping you improve your credit with every purchase you make.

Also, there are specialized loans, such as passbook, CD, or credit builder loans, that might suit your needs. These are secured by a deposit or collateral, so they’re easier to get approved for. As you pay them off, you’ll gradually rebuild your credit. Since these loans are backed by your own money, lenders feel more secure, making it easier for you to start fresh on your credit journey.

Myth 5: If your credit report was free of negative marks before you declared bankruptcy, you might start off with a slightly higher credit score post-bankruptcy than someone who had negative information on their report before filing

Truth: Having a positive payment history and no negative information beforehand doesn’t significantly lessen the impact of bankruptcy on your credit score. The fact that you’ve filed for bankruptcy and how long it’s been listed on your credit report are the most critical factors in determining your credit score after bankruptcy.

Myth 6: Bankruptcy impacts everyone’s credit score in the same way, regardless of how much debt they have or the number of debts involved

Truth: The specifics matter. Your credit score will take into account things like the total amount of debt you’ve discharged and the ratio of negative to positive accounts on your credit report. If your bankruptcy involves a relatively small amount of debt and just a few accounts, your credit score might end up being higher than someone whose bankruptcy reflects a more significant debt situation.

Myth 7: All bankruptcy-related information remains on your credit report for ten years without any exceptions

Truth: In reality, it’s a bit different. The public record of a Chapter 7 bankruptcy is indeed on your report for ten years. However, other bankruptcy references, such as the ones listed below, only stick around for seven years:

• Accounts marked as “included in bankruptcy”
• Debts from third-party collections, judgments, and tax liens that were cleared through bankruptcy
• Public record details from a Chapter 13 bankruptcy

When these items start to clear from your report, you’re likely to see a noticeable boost in your credit score. You may find a credit repair agency that can help you get your credit cleaned up.

Myth 8: Bankruptcy will destroy my credit forever

Truth: While bankruptcy does significantly impact your credit initially, it won’t last forever. It remains on your credit report for a maximum of ten years. Once it’s removed, it no longer affects your credit score. If you focus on maintaining good financial habits and steadily rebuilding your credit during those years, you can restore your credit health and potentially make it stronger than it was before. According to Blue Bee Bankruptcy Law, constant late payments and collections can impact your credit the same or MORE than filing for relief from debt. Some things in life are permanent but bankruptcy won’t destroy credit forever.

Final Thoughts!

There are bigger issues to tackle than just a low credit score when you’re drowning in debt. The harsher consequences of excessive debt—like losing your home to foreclosure or facing wage garnishments—far outweigh the impact on your credit score. 

If you’re in a situation where your debts are unmanageable and you risk losing essential assets, your credit score should be the least of your immediate concerns.

In such a case, filing for bankruptcy might just be the lifeline you need. It can help protect your home and other crucial assets. 

Plus, remember that your credit score isn’t fixed permanently. While a lower score is a temporary side effect of bankruptcy, it shouldn’t top your list of worries. 

Credit scores can be rebuilt, and sometimes quicker than you might expect after bankruptcy. With good financial health after bankruptcy there’s no need to believe your bankruptcy will destroy credit your forever.

Contact a bankruptcy attorney near you to find out if it may be beneficial in your situation.