How does personal bankruptcy affect your interest rate if you are recovering from past financial problems? When you file for personal bankruptcy, there are two paths to choose from.
Chapter 13 Bankruptcy provides an extended period of time for you to pay your debt. The payments are based on your current income and must be approved by the Bankruptcy Court.
The total amount repaid to creditors is determined by the length of time the bankruptcy repayment period lasts and the amount paid to the creditor each month.
In the end, you may be repaying less than the total amount of your debt to some of the creditors but will be paying the maximum you are able to pay over the 3-5 years of court ordered repayment.
Today, Chapter 7 Bankruptcy is more common. In the past, personal bankruptcy was considered embarrassing. It was often a result of a consumer who spent wildly without the means to repay.
People who lived above their means for years could be forced into bankruptcy through loss of income. Medical expenses were responsible for many personal bankruptcy filings and small business failures led to many more.
In the past few years, the bankruptcy scenario has changed. High unemployment rates and underemployment rates have made it impossible for many people to pay their monthly debt obligations.
Effects of Bankruptcy on Credit
Bankruptcy remains on your credit report for 7-10 years. This has a devastating effect on your credit rating. However, this is not usually your main concern as by the time you must file for bankruptcy you are already behind in payments and your credit is damaged.
When you file for bankruptcy relief, your main thought is to stop calls from collection agencies and to leave the mountain of crushing debt behind you as you make a fresh financial start.
You may ask your attorney how bankruptcy affects your interest rates when he is preparing to file for bankruptcy on your behalf. Chances are, he will tell you credit card will not be available to you so not to worry about interest rates.
There are few credit lenders today offering low interest rates to anyone. However, the most reasonable rates are always offered to those consumers who have spotless credit and a high three digit credit score.
If you have money in a bank, it’s easier to get a bank loan. The same is true in the credit rating industry. If you have good credit established, you qualify for the best credit terms offered.
When you are late on a credit payment, your credit risk increases in a lender’s view. That’s understandable and it’s the reason financial experts advise making credit card payments before the due dates.
When you file for bankruptcy, you are making a statement that you will not be paying your credit card debt. If you are behind on your payments, bankruptcy may seem like a magic bullet.
The collection agencies that have been calling you several times a day immediately stop the calls when you say “I have filed for bankruptcy – here is my attorney’s phone number”.
A few months later the Bankruptcy Court approves your case and those overdue credit card debts magically disappear. Or do they? In your credit bureau files, the debts you dismissed through bankruptcy show they were dismissed.
After Bankruptcy You are Debt Free
You are also in the highest risk category if you try to apply for new credit card accounts. On the bonus side for lenders, you cannot declare bankruptcy again for at least eight years. That gives lenders time to collect through court actions if necessary.
The ability to get a credit card is your main focus and you quickly realize if you want credit again you will pay a high price for it.
There are sub-prime credit lenders who provide credit cards designed for consumers who need to re-establish their credit after a bankruptcy. Until recently, there were only a few such lenders and often the fees and interest were so high the credit accounts were not worth having.
Today, an increasing number of reputable credit lending banks are approving new credit cards for consumers who have gone through a bankruptcy. The terms and fees have now been regulated by new laws to protect the consumer.
Bankruptcy does affect credit card interest rates but the high rates do not have to last forever. A year or two of paying high interest and using a new credit card wisely can rebuild your credit following a bankruptcy and put you back in a lower risk category which allows you to qualify for standard credit cards at better rates.
Summary
Understanding how bankruptcy affect credit card interest rates is important information if you are considering filing for debt relief from the courts.
If your debts are unsecured debt such as medical bills or credit card debt, it is possible to file bankruptcy and still have the ability to obtain a credit card.
