Bankruptcy is a significant financial event that can have lasting effects on your ability to secure credit. When you file for bankruptcy, this filing will stay on your credit report for several years, typically seven to ten years, depending on the type of bankruptcy filed.
While not all types of bankruptcy will cause a major drop in your credit score, the effects can still be substantial. Some of the effects of bankruptcy on your ability to secure credit – until you rebuild your score – may include the following.
Restricted credit limits
Lenders may be hesitant to extend credit to individuals who have filed for bankruptcy, and if they do, they may offer lower credit limits. This is because bankruptcy indicates to lenders that you have struggled with managing your debts in the past, making you a higher-risk borrower. As a result, they may limit the amount of credit they are willing to extend to you to reduce their own risk exposure.
Higher interest rates
Bankruptcy can lead to higher interest rates on any credit that you are approved for. Lenders may view individuals who have filed for bankruptcy as higher-risk borrowers, and to compensate for this increased risk, they may offer credit with higher interest rates. This means that even if you are able to secure credit after bankruptcy, you may end up paying more in interest over time, making borrowing more expensive for you.
Longer approval process
Since you will be listed as a higher-risk borrower after bankruptcy, lenders may subject your credit applications to more scrutiny, resulting in a longer approval process. They may request additional documentation, conduct more thorough credit checks or require co-signers or collateral to mitigate their risk. The extended approval process can be frustrating and time-consuming, making it more difficult to access the credit you need in a timely manner.
To better ensure your bankruptcy filings are completed in accordance with all applicable laws and processes, you should consider getting legal guidance. This will help ensure that your rights are protected throughout the bankruptcy process and as you start rebuilding your credit and financial foundation.