What Happens To a Credit Score After Bankruptcy?

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If you owe a lot of debt that you cannot pay, you may be considering filing for bankruptcy. Although bankruptcy can be a helpful tool for getting your finances back on track, there are long term effects to your credit report that you should understand.

How Does Bankruptcy Affect Your Credit?

Bankruptcy has several effects on your credit. It can lower your credit score. It is also listed on your credit report for several years, potentially affecting your ability to get lines of credit in the future.

How Bankruptcy Affects Your Credit Score

According to FICO, the creator of the most commonly used credit score, how your score will change is based on your past credit history.

If you have a lot of negative entries on your credit report before you file for bankruptcy, you won’t see a huge drop in your credit score. However, you probably already have a low score. 

However, those with nothing negative in their credit history (and probably a pretty high credit score) will see a more drastic drop.

Immediate Impact On Your Credit Score

After the bankruptcy process is complete, your score will likely drop up to 200 points. However, overtime, this won’t be as factored in your credit score as much. Eventually, it won’t be factored in at all. 

After a few years, and some good credit habits, you should see your score start to go up. 

How Long Does Bankruptcy Affect Your Credit?

The length of time your bankruptcy will be noted on your credit report depends on the type of bankruptcy you filed.

• Chapter 7 stays on your credit report for up to 10 years
• Chapter 13 stays on your credit report for up to 7 years

Chapter 7 requires liquidation of debt and some assets. Chapter 13 allows you to keep more assets and set up a payment plan for your debt.

If you defaulted on loans or debt, those will also be reflected on your credit report for 7 years. However, they will be listed as “discharged” meaning you aren’t responsible for paying them because of the bankruptcy.

Getting New Lines of Credit After Bankruptcy

Although it isn’t impossible to get approved for a credit card or a loan when your bankruptcy is still on your report, it can be more difficult. It’s also likely that if you get approved, you will have to pay higher interest rates. 

To make sure you can get lines of credit when you need it, you should start working on rebuilding your credit right away.

How to Rebuild Credit After Your Bankruptcy

It is possible to rebuild your credit score after you file for bankruptcy. In fact, America’s Debt Help Organization estimates that if you start practicing good habits quickly, you can start seeing some serious improvements within two years of filing for bankruptcy. Here’s what you should consider:

Pay Bills on Time

When someone requests your credit report, this is the number one thing they’re looking for. It’s also 35% of your FICO credit score.

Get a Secured Credit Card

Secured credit cards require you to put down a deposit in order to use a line of credit. For example, if you put down $1,000, you can have a line of credit up to $1,000. 

These types of cards are meant for people who have no or poor credit history. Because you can’t spend over your deposit, this makes you a less risky borrower to a lender. These cards can boost your credit score by:

• Helping your credit mix, or making sure you have diverse lines of credit (10% of your score)
• Raising your available credit amount (30% of your score)

This is also part of creating a positive payment history. In fact, making on time payments on a secured credit card can help you start to raise your credit score in as little as six months, according to Experian.

Take Out a Credit-Builder Loan

Like the name suggests, this loan is meant to help you build up your credit. The money you borrow is held in an account and when you make payments, they are sent to a savings account. After you pay off the loan, you get access to the savings account. 

This also helps your credit by giving you a positive payment history, plus it can help you rebuild your savings account.

Monitor Your Credit Report

Make sure you check your credit report at least once a year. This can help you find inaccuracies or potential fraud that can hurt your credit history. If you think you find an error, make sure to dispute it so it’s removed.

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