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Will Chapter 7 bankruptcy affect your interest rates?

Chapter 7 is a form of personal bankruptcy that can serve as debt relief for individuals and small business owners overwhelmed with payments with which they are struggling to keep pace. Also known as “liquidation bankruptcy,” Chapter 7 can temporarily excuse you from your debt obligations while you liquidate your nonexempt assets and build a court-approved repayment plan.

While bankruptcy can grant you the short-term relief you need in an overwhelming situation, it can also have long-term consequences on your financial state. Specifically, you should be aware of how filing for Chapter 7 bankruptcy will affect the interest rates of any loans you take out in the future.

Will filing for Chapter 7 lead to higher interest rates?

One of the immediately-apparent effects of filing for bankruptcy is a drop of up to 150 points in your credit score. Experian explains that many consider a credit score below 580 to be poor, making you a risky borrower in the eyes of most lenders. This can result in a higher interest rate or ineligibility for certain loans, such as small business loans which typically require a minimum score of 640.

How can you improve your interest rates after bankruptcy?

Rebuilding your credit score after filing for bankruptcy should be a high priority, especially as an entrepreneur who may need to take out a small business loan to keep your operations running. Creating a budget that allows for timely payments in the future and using a secured credit card are positive steps to take toward restoring your financial health and lowering your interest rates.

Filing for Chapter 7 bankruptcy can be the right solution for getting back on your feet, but it will likely affect the way lenders perceive you. Rebuilding your financial reputation can help you receive manageable interest rates again.

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