Bankruptcies are damaging to credit scores. There is no doubt about that. But what a lot of people don't realize is that if you know certain things about how bankruptcies work and WHY they are so damaging, you can rebuild your credit relatively quickly after the bankruptcy and usually go about life more or less as normal.
For most things related to loans, including buying a home or a car, a bankruptcy isn’t exactly a death sentence. If you take some steps and handle your credit right, you could come out with a good credit score and reasonable terms and interest rates on loans within a year or two. Contrary to what some people may think, you CAN buy a home with a bankruptcy on your credit, and you CAN buy a car with a bankruptcy on your credit.
That said, bankruptcy can certainly hurt. Your credit score will of course drop significantly, and for a while your credit might SEEM "dead in the water". One area (among many) that a bankruptcy can hurt you is in the area of applying for jobs. If the job checks your credit and sees the bankruptcy, it could rule you out for the position (whether they tell you that is the reason or not.)
How can you deal with the job issue? We’ll cover that in just a minute. First we need to understand what is so damaging about a bankruptcy, and how to address it.
When you have a bankruptcy on your credit, there will have been other negative items on your report associated with it. Those items SHOULD be listed as being included in the bankruptcy, but often times they are not. And this is where the score really starts to drop.
From the perspective of the scoring system, this makes it look like you filed bankruptcy, and then continued being careless with your credit and continued to get derogatories on your credit.
"John filed for bankruptcy, and then went on getting late pays, charge offs, and collections on his report right away!"
That would look pretty bad, wouldn’t it?
So the key to increasing your score after a bankruptcy is to keep your credit clean, and get those items that are bogging down your score CORRECTED so that your report reflects that they are included in the bankruptcy.
When you do this, and start the process of rebuilding credit, your score is likely to GO UP, sometimes rather high, and often in a relatively short amount of time. In just a year or two, you could have your score where you need it to purchase the home or car that you want.
The reason your score goes up like this is because from the perspective of credit scoring, it appears as though you have learned your lesson and are being responsible with your credit. And if you’re rebuilding credit it looks like lenders are trusting you again and you are on the road to recovery.
So the scenario is then something like:
"John has a bankruptcy on his credit report, but he has built some good credit history and is keeping it squeaky clean. John must have learned his lesson."
As a result of this, your score can go up dramatically. However, you should be aware that removing the bankruptcy can change that.
Maybe you still want to remove the bankruptcy. Maybe it’s pride. Maybe you’re worried about the job issue. Whatever the reason is, how would you go about it?
The answer is simple. Deal with a bankruptcy like any other public record. Look for problems with the credit report listing, the process, and the details.
Remember, the bankruptcy is yours. So getting it removed is going to be extremely difficult and probably take a lot of time, energy, and money.
Once you have spent all that time, energy, and money, and possibly even hired an attorney and jumped through various other hoops, you finally "WIN" and get the bankruptcy removed.
You happily get a copy of your credit reports and score so that you can see your new "clean" credit reports and see how it has helped your score.
You may be surprised at this point to find that your score will have most likely DROPPED as a result of removing the bankruptcy.
Because remember, from a scoring perspective before you were a consumer who had learned their lesson after a bankruptcy. The small amount of positive credit you had built was viewed in light of the bankruptcy and what you had already been through. Now, with the bankruptcy gone, from the scoring system perspective you just look like a consumer with very little credit who can only get approved for sub-prime loans.
The moral of the story is that removing the bankruptcy may not be the most beneficial thing for your credit score.
In the event that you have a bankruptcy on your credit report and you have successfully rebuilt your credit and score, you may have some hope on the job front.
The best thing you can do is to be proactive. Don’t wait for the prospective employer to run your credit and get a surprise when they see the bankruptcy. What’s the point in going to all the effort of making yourself look good for the interview if skeletons are just going to fall out of the closet when you open the door?
Instead, use the bankruptcy and your efforts to rebuild your credit as a selling point. Check your credit reports and scores ahead of time. Then, when you find out that the employer checks credit (and try to find out right away), be up front with them about what you’ve been through. Explain that they’ll find a bankruptcy on your credit report, and tell them how you’ve gotten things straightened out and even raised your credit score to 700 since then. You could tell them about the hardship, about what you learned, and about how it has made you a better person and even MORE fit for the job for which you are applying. Basically, just be honest and upfront.
If you do this, it could help to "frame" you better against a person that doesn’t have a bankruptcy on their credit.
Without the preemptive damage control, the employer would probably be surprised when they see your credit report and think that if you were hiding that, there is probably more that you’re hiding, and you may not be trustworthy or responsible. The "good impression" you left after the interview will be reduced to a mere facade.
There is no doubt that bankruptcy sucks. I get that. It is also damaging to your credit, and it takes some work to overcome that damage. But it can be done.
The best way to get a bankruptcy off your credit report is never to file in the first place. I understand that this isn’t always an option, but if you have to file for bankruptcy then you may have to live with the consequence of the bankruptcy on your credit. (I know the concept of consequences for our actions can be shocking.) It’s not impossible to remove them, but it is difficult. And if you succeed, you could end up actually hurting your score more than helping it.