Excessive debt and poor credit scores tend to go hand-in-hand because when you fail to make payments on your debt, that causes more debt by making your interest rates rise while it places a negative item on your credit report. In such a situation, you may be able to benefit from bankruptcy, credit repair or both. Each has advantages and disadvantages.
Basics of Bankruptcy
Individuals who file for bankruptcy generally file for either Chapter 7 or Chapter 13. Chapter 7 will wipe most of your debts clean, but it may require you to forfeit any valuable property you may have that is not a necessary part of your daily life, such as a second house, a second car, stocks, bonds or expensive jewelry. Chapter 13 helps you by restructuring your debt payments and lowering interest rates so that you can pay back your debts in full in a period of three or five years. Both types of bankruptcy have a very heavy negative effect on your credit score.
Aspects of Credit Repair
The purpose of credit repair is to rebuild your credit score after it has become low due to negative influences such as failure to make required payments. The first method of repairing your credit score is getting incorrect negative items removed from it. If you feel that anything on your credit report is incorrect, you may contact your credit bureau and contest that item. If your creditor fails to prove that the item is correct within a certain amount of time, the credit bureau will remove that item from your report.
Another method of repairing your credit score is by reorganizing your finances and negotiating with creditors in such a way that you can repay your debts. Credit counselors can often help you to make a careful budget such that you can meet your debt service requirements. If this is not enough, you may benefit by getting a debt consolidation loan. Such a loan will pay off your existing debts and set you up with a low recurring payment. However, it will require you to make these recurring payments for a long time, increasing the total amount of money that you end up paying in interest. In paying off your debts through this process, though, negotiate with your creditors. They often can remove negative items from your credit report if you pay the debt that you owe them. Make sure that removal of the negative item is part of your deal with your creditors.
Choosing Between the Two
Because of the negative effect that bankruptcy has on your credit score, it should come only as a last resort. Exhaust all of your credit repair options first. One very important thing you may be able to do to help repair your credit and keep from filing for bankruptcy is to renegotiate your payment requirements with your creditors. You may be able to negotiate a lower interest rate or lower required payments in exchange for a higher interest rate. If you tell them that you are considering bankruptcy, they may be willing to cancel your debt in exchange for a payment of a fraction of what you owe. Reaching this sort of settlement with your creditors will help your credit score by eliminating outstanding debt and by preventing future delinquencies on the payments for those debts.
Credit Repair After Bankruptcy
If you do decide to file for bankruptcy and your credit score suffers as a result, you can do various things to help rebuild your credit. First, you can make sure to make full, timely payments on any debts that your bankruptcy did not discharge, such as student loan debts. Second, you can rebuild your credit by using credit cards. While having a bankruptcy on your record may make it hard to qualify for some types of credit, various institutions offer credit cards specifically for people who have gone through bankruptcy. These cards come at a high interest rate, but you may be able to avoid paying interest if you pay off the full balance of the card every month. Every time you make a payment on such a card, it will raise your credit score.
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