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Don't be misled about bankruptcy's impact on your credit score

For better or worse, we currently live in a world that seems to revolve around paying with plastic. If you have a hard time believing this, consider everything from the pay-at-the-pump option at gas stations, the card readers small business owners attach to their tablets and the basic act of online shopping. Better yet, consider the looks you would likely get if you tried to pay by check in any retail setting.

Given this credit-centric focus, the question naturally arises among those who are filing for personal bankruptcy as to whether it will cause real harm to their credit score and, if so, whether they can take steps to repair it.

Does bankruptcy really harm a person's credit score? 

One of the more popular -- and unfortunate -- myths concerning filing for Chapter 7 or Chapter 13 is that it will cause major damage to a person's credit score. The reality, however, is that while filing for personal bankruptcy will affect a person's credit score, it will not cause irreparable harm.

In fact, a study conducted by researchers with Federal Reserve Bank of Philadelphia determined that while the credit scores of consumers typically fell in the 18 months preceding a bankruptcy filing, they actually climbed steadily once the process was complete.

What can a person do to help raise their credit score post-bankruptcy?   

According to experts, there are two viable options for raising a credit score post-bankruptcy: a credit-builder loan and/or a secured credit card.

With a credit-builder loan, a person typically borrows anywhere from $500 to $1,000, which is then placed into a savings account or a certificate of deposit. This money, in turn, can be claimed once the person has made 12 months of payments, all of which are reported to the credit bureaus and, by extension, help them raise their credit score.

With a secured credit card, a person makes a deposit of anywhere from $200 to $2,000 with a bank, which then issues a card with a credit line equal to the amount of the deposit. If the person uses the secured credit card responsibly and makes regular full payments, these will be similarly reported to the credit bureaus and their credit score will slowly improve.

How long does a bankruptcy filing remain on a credit report?

While a bankruptcy filing will remain on a credit report for ten years, individuals who take proactive measures like those outlined above and eventually secure a regular credit card, which they use prudently, will see its impact on their credit score largely mitigated.

If you have questions about bankruptcy and its impact on credit, or the bankruptcy process in general, consider speaking with an experienced legal professional. 

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