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Consumer Watch: How a bankruptcy might not crash your credit score

Bankruptcy leaves a serious negative mark on your credit report, but can be the first step to fixing overwhelming financial problems. (file)

Bankruptcy is a serious financial decision that comes after your debt truly becomes overwhelming.

“This is not just a couple of thousand dollars’ worth of credit card debt. This is unbearable amounts of debt that is really getting in the way of your daily life that you don't see a way out of,” says Lisa Rowan, Savings Expert with The Penny Hoarder.

However, Bankruptcy doesn’t always have the negative effect most people think, though even in the best circumstances, it can take still 7 to 10 years to recover.

There are two types of bankruptcies. Chapter 7 wipes most of your debts while Chapter 13 puts you in a payment plan on debts for several years, and if you still owe money after the time is up, the debt is wiped. Bankruptcy doesn't resolve all types of debt-- often you are still responsible for a mortgage, student loans, child support, tax debts, and a few other types of debt.

Not only does it take about a decade to recover from this, but it can tank your credit score. The reality though, if you are considering this, is that your score is probably already low.

“A lot of people who file for bankruptcy already have trouble with their credit score. Maybe they have struggles with debt for many years, and as a result they have a lower credit score,” says Rowan.

If you are in debt but have a good credit score, you might see a bigger effect in how far your credit score drops after filing for bankruptcy.

“If you are already looking at a credit score between 400 and 600, maybe, you probably aren't going to see a huge difference, a huge impact on your credit score when you file for bankruptcy,” says Rowan.

Whether you are working your way out of debt, or considering bankruptcy, it's important to fix the root of the problem. Learning to budget, and save money will keep you out of trouble in the future.

Even if your score isn't hit particularly hard, there will be impacts on your credit report. This means waiting 7 to 10 years before you are approved for new lines of credit, like getting a mortgage on a home. Getting into healthy financial habits is important, and that can mean getting in the habit of living off of 80 percent of your income or less, and saving 20 percent every time you get paid.

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