Bankruptcy & Your Credit Score
Understand the impending damage, then make a plan.
The amount a bankruptcy filing will impact your credit score can vary widely depending on where your credit score started and the amount of other negative items and penalties your credit report already contains. If you have a good credit score, the penalty from bankruptcy will hurt your more than it would if your credit score has already hit rock bottom.
But one thing is certain – filing for bankruptcy will incur credit penalties that remain on your credit file for years to come. That doesn’t mean you have to put your life on hold – you can recover. Still, you have to understand what to expect so you can make a plan to move forward.
The information below can help you understand exactly that. If you still have questions or you need help to take the first steps, call us or complete the form to the right to connect with the right specialists for your needs.
Seven or ten years?
Filing for bankruptcy generates a negative item on your credit report that remains from a certain amount of time after your date of final discharge.
- The penalty lasts for seven years from the date of final discharge for a Chapter 13 bankruptcy.
- The penalty remains for ten years from the date of final discharge for a Chapter 7 bankruptcy.
Of course, you notice that those penalties both start from the date of final discharge – that’s when the judge or trustee signs off that everything is complete and the remaining balances on your debts are officially cleared (discharged). So the penalty doesn’t get applied immediately after you file.
Fact: Chapter 7 usually takes about 1 year, while Chapter 13 bankruptcy can take 3-5 years.
With that in mind, it’s going to be a long road ahead before your credit profile will be completely free and clear of the bankruptcy. But it will happen. Once the 7-10 years is up, the negative item will be removed completely from your credit profile, so it won’t affect you forever.
How bad is the damage, really?
Determining exactly how many points filing for bankruptcy will impact your credit is impossible. The impact of a negative remark on your profile varies depending on the number of other negative items that are there.
In 2010, FICO released a report that showed how negative items like bankruptcy would affect a consumer’s credit. The basically showed the impact of bankruptcy on someone with a 780 versus someone with a 680. At the higher credit score, the negative impact would be up to 240 points. At the lower credit score, the damage would only be around 150 points. In both cases, the consumer ended up with a credit score less than 550.
Fact: FICO estimates the credit score damage of bankruptcy to average 130-240 points.
Of course, if your credit score is already below 550, then the damage will be less. Remember, FICO credit scores only go down to 300 and it’s actually rare to see a score below even 500. So if you’re starting at rock bottom, you don’t have far to fall.
Early offset of negative items
It’s really important to note that negative items on your credit report don’t mean you’re stuck until the penalty expires. The U.S. credit system can be tough, but it’s also pretty forgiving when it comes to offsetting the damage of negative items like bankruptcy.
Essentially, from the moment a credit score penalty is incurred because of a negative item like bankruptcy, you can start to work to offset the damage it causes by doing positive things for your credit. Every on-time payment and minimized debt will help you rebuild from the low point you hit once your bankruptcy is complete.
So, for example, many bankruptcy filers get secured credit cards once they complete their bankruptcy. This type a type of credit you can get even with bad credit, because you offer a deposit to secure your credit line. So you get a credit card with a few hundred dollar limit and then use it strategically so you can manage the debt and establish a positive payment history.
If you have any loans, including things like an exempted mortgage or all of those federal student loans that weren’t discharged during your bankruptcy filing, the payments you make on those build good credit history for you, too. Even if you consolidate the student loans, the payments count as being made on time, so you build credit.
It’s possible even 1-2 years after you file for bankruptcy that you can start getting approved for new lines of credit. Some consumers even qualify for mortgages only a few years after bankruptcy. It’s all a matter of how much work you put in to rebuild your credit and the financing you can find.
Beware of predators!
It’s important to note that there are types of credit you can get after you complete a bankruptcy filing, such as secured credit cards. There are also loans designed to help people in bankruptcy recovery to achieve their goals in spite of bad credit.
But at the same time, there are plenty of predatory lenders out there who want to take advantage of your tough situation. These loans can stack the deck against you when it comes to repaying the money on time, and defaulting will only extend your credit problems. So you need to be really careful when you apply for credit or loans after your bankruptcy while you’re still trying to rebuild your credit. Make sure you understand the terms of any loan fully and have the means to pay back the money on time – or, even better, early.