When debts become overwhelming, bankruptcy can be an effective solution for getting the situation under control in the short term. However, it is important to be aware of the long-term implications of filing for bankruptcy.
Chapter 7 and Chapter 13 bankruptcy are the most common filing options for individuals and small business owners. Both options have the potential to increase your future interest rates on any loans you take out, so it is important to understand the process and how you can return to normalcy after bankruptcy.
Will filing for bankruptcy lead to higher interest rates?
Filing for any type of bankruptcy effectively marks you as a risky borrower who might not be capable of repaying their debts, and your credit score will reflect this. Filing for bankruptcy can cause your credit score to quickly drop by 100 points or more. Experian explains that many lenders consider a score below 580 to be poor, meaning that loans will likely come with higher interest rates to offset the risk.
How can you lower your interest rates after bankruptcy?
It is quite possible to rebuild your credit and attain reasonable interest rates again after bankruptcy. The first step is to create a budget that makes it easy to make timely payments on current and future debts. You can also use a secured credit card as a tool for rebuilding credit.
While it is true that bankruptcy can lead to higher interest rates in the future, you should not let this deter you if bankruptcy can relieve you from an overwhelming situation. There are options and resources available to you for rebuilding your credit and getting interest rates under control again.