What Happens to Your Credit Score after Bankruptcy?

Filing for bankruptcy can give you a fresh start by clearing away most, if not all, of your existing debt. However, many people put off filing for fear of the consequences. One of the biggest concerns is the damage that bankruptcy will cause to a consumer’s credit.

While the credit score decrease can be significant, it depends on where your score is before you file. What’s more, many experts argue that credit score recovery is faster for people who file versus those who don’t. In other words, failing to file could keep you in debt longer and lead to more credit report penalties.

With that in mind, let’s break down what happens to your credit report and score during bankruptcy. We’ll also explain what you can do after you receive final discharge to get your score back.

How long does bankruptcy stay on your credit report?

Filing bankruptcy gets reflected on your credit report in two ways.

1. Bankruptcy filing record

The bankruptcy filing itself will appear in the public records section of your credit report for a limited time.

Chapter Filed	Reporting period
Chapter 7	Up to 10 years from the filing date
Chapter 11	Up to 10 years from the filing date
Chapter 12	Up to 10 years from the filing date
Chapter 13	Up t0 7 years from the filing date

2. Accounts included in bankruptcy

The accounts included in your bankruptcy filing will also have status notations for filing.

• During your filing, account statuses will note “included in bankruptcy”
• After discharge, the status will change to “discharged in bankruptcy” and the balance show $0

These statuses and accounts remain on your credit report for seven years from the date that each account became delinquent. So, even if the bankruptcy record remains for ten years, the accounts included will drop off your report after seven.

NOTE: Payment history may not be updated during your filing!

Although your credit report will list your accounts and show the “included in bankruptcy” status while you file, payment history typically won’t get reported. Typically, data furnishers will not report payments to the credit bureaus, whether you make the payments on time or not.

This may be frustrating, particularly for debts that may be current, such as a mortgage. However, lenders avoid reporting payment history to avoid discharge violations with the court.

How much will bankruptcy affect your credit score?

In 2010, FICO released a report that showed examples for the average credit score after bankruptcy. The decrease when you started with a high score is more significant.

Starting Credit Score	Amount Your Score Declines	Average Credit Score after Bankruptcy
780 credit score (excellent)	240	540
680 credit score (fair)	150	530

In both cases, you end up with a bad credit score. But the decrease from fair to bad is less than from excellent to bad. Essentially, you have more to lose when you have good or excellent credit. If you already have bad credit (less than 550 credit score) then the point-damage may not be that bad. Remember, FICO scores only go down to 300, but it’s rare to see anything below 500.

What is the credit score cost of waiting to file?

While a 240-point drop is certainly worth noting, it’s also worth noting how much waiting to file or not filing at all can negatively impact your score.

Bankruptcy can give you a clean break from debt, which means you can focus on rebuilding. On the other hand, digging yourself out of debt can take years and lead to more damage.

• Missed payments remain on your credit report for seven years.
• Credit card charge-offs and loan defaults remain seven years from the date the account first became delinquent.
• Collection accounts remain for seven years from the date the original account became delinquent.
• Debts that get settled remain on your credit for seven years from the date of filing.

So, while bankruptcy will negatively affect your credit, not filing can also have a significant negative impact. And the damage can last just as long.

Why you need to work on your credit ASAP

If you have a 550 credit score, borrowing is going to be challenging. A credit score of 550 or lower is usually too low to qualify for a mortgage. However, you’re not that far off from the score you need to qualify for this good debt. With FHA financing options, you only need a 560-600 to qualify. Of course, if you want to use traditional financing options, you generally need at least a 600 credit score.

However, besides loan approvals there are other concerns that come with a low score:

1. Lower credit limits on credit cards, even cards offered through pre-approved screenings
2. A higher interest rate on almost any type of financing you seek; increases total cost and may increase monthly payments, too.
3. Less ability to qualify for attractive advertised terms on financing like car loans – i.e. you can’t qualify for $0 down advertised dealership loans.

So, is bankruptcy bad for your credit? Yes. But it might not be as bad as you think. And there are financing options specifically designed to help people in your situation. For instance, there are solutions for buying a car after bankruptcy.

Credit tips after bankruptcy

Once you receive discharge, you can immediately get to work rebuilding your credit. While the credit report notation for bankruptcy may last 7-10 years, you can start taking steps to improve your score without delay.

The good thing about credit scoring in the U.S. is that the “weight” of negative information on your credit score decreases over time. This means that positive actions you take after bankruptcy can offset that negative public record and other credit blemishes in the past.

This plan will help you get started to improve your credit as soon as possible:

1. Make a budget that covers all your expenses, even the small incidentals, so you can avoid credit card debt.
2. Prioritize paying off debt and building your emergency savings fund to avoid debt on unexpected expenses and emergencies.
3. If you have debts that were not discharged through bankruptcy, such as student loans, a mortgage, or an auto loan, make sure to make all the payments on time.
4. Consider getting a secured credit card, which is a card you open with a small cash deposit.
5. Only make charges that you can pay off in full every month.
6. As you feel comfortable, gradually add accounts if you have a clear need for them and can afford to pay off the balances in full every month.

Remember that payment history is the single most important factor used in calculating your credit score. That means paying your bills on time will be an essential part of improving your score.

The second most important factor is credit utilization. This measures the amount of your available credit limit that’s in use. Thus, paying off your credit cards in full every month will help you maintain the best utilization ratio.