How Bankruptcy Impacts Credit Scores
Building credit has become a staple in our financial lives. Credit helps us get loans and make major purchases. However, if you are struggling with making payments and are drowning in debt, maintaining a high credit score should not be your top priority. Getting rid of your debt is a great way to help you get a fresh start with your finances, which can help you get an even higher credit score than the one you might have now.
Bankruptcy is a tool that has benefited many peoples financial situations however, it will likely impact your credit score. The impact bankruptcy may have on your credit score is largely based on where your credit stands now and what information is on your credit report. According to myFICO, a high credit score can expect a huge drop in their score, compared to someone with a modest score . Another factor to consider is the number of accounts included in the bankruptcy filing.
If credit problems have already pulled your score into the 500-range, you have a little less of a credit score to protect. Therefore, your bankruptcy filing might not have as big of an impact as you think.
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How Much And How Soon Credit Scores Can Rise
Using data from Equifax credit bureau, researchers at the Federal Reserve Bank of Philadelphia found that filers Equifax credit scores plunged in the 18 months before filing bankruptcy and rose steadily afterward.
Among the findings:
The average credit score for someone who filed Chapter 7, the most common type of bankruptcy, in 2010 was 538.2 on Equifaxs 280 to 850 range. By the time the filers cases were discharged, usually within six months, their average score was 620.3.
The other type of bankruptcy, Chapter 13, requires a three- to five-year repayment plan, which most people dont complete. Those who did and got a discharge, though, saw their scores rise from 535.2 to 610.8, the Philadelphia Fed researchers found.
A recent study by FICO, the company that created the leading credit score, found much smaller gains. Median credit scores for people who filed for bankruptcy between October 2009 and October 2010 rose from the 550s before they filed to the 560s afterward, says Ethan Dornhelm, senior director for FICOs scores and analytics group.
After two years, 28% of bankruptcy filers had scores of 620 and above. After four years, 48% had scores of 620 or above, and only 1% scored 700 or above.
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How Does Bankruptcy Affect Your Credit Score
Most types of negative information in your credit report will affect your credit score. If you are slow to pay or skip payments, your score will reflect that. Carrying a large amount of debt compared with the limit on those accounts can also be an issue.
Before reaching the point where you file bankruptcy, you probably found it difficult to pay regularly on your accounts. You might have maxed out most or all of your credit cards. Either circumstance will negatively affect the credit score.
It’s difficult to predict exactly what your credit score will do after you get your bankruptcy discharge. How bad your credit score is when you file doesn’t seem to have much effect on where you end up. If you start low, you’ll come out of bankruptcy low. If you start high, your score will drop a lot. But most people report that they end up at about 550 as they come out of bankruptcy, regardless of whether they start out with a high score or a not-so-high score.
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Apply For A New Line Of Credit
Adding a new line of credit can demonstrate that you can responsibly make on-time payments. In turn, itll help your credit score. However, when you apply for new lines of credit, the lender will do a hard pull on your credit. Every time you apply for new credit, your prospective lender accesses your credit report, says April Parks-Lewis, director of education and corporate communications at Consolidated Credit. Those inquiries can drag down your credit score.
As too many hard inquiries will ding your credit score, try to apply for credit lines you know you can qualify for. You can also apply to get prequalified, which results in a soft pull of your credit. When youre trying to build your credit after bankruptcy, here are some types of credit for you to consider:
Why this matters: A new line of credit can help you build your creditworthiness.
How to get started: Choose one of the options from above that fits your situation best and work on keeping that line of credit in good condition.
How Long Can Bankruptcy Affect Your Credit Scores
Bankruptcy can affect your credit scores for as long as it remains on your credit reports. Thats because your scores are generated based on information thats found in your reports.
But the impact of bankruptcy on your credit scores can diminish over time. This means your credit scores could begin to recover even while the bankruptcy remains on your credit reports.
After the bankruptcy is removed from your credit reports, you may see your scores begin to improve even more, especially if you pay your bills in full and on time and use credit responsibly.
How Will My Credit Score Be Affected By Filing For Bankruptcy
The biggest downside to filing for bankruptcy is that it will negatively affect your credit score, however, you should understand that the damage done to your credit score is not permanent, and it is not irreversible. One of the primary factors in determining how bankruptcy will affect your credit score is how good your credit was before you filed for bankruptcy. If your credit score was already poor, filing for bankruptcy will affect it negatively, albeit not nearly as much as if your credit score was solid before filling.
Review Your Credit Reports
Monitoring your credit report is a good practice because it can help you catch and fix credit reporting errors. After going through bankruptcy, you should review your credit reports from all three credit bureausExperian, Equifax and Transunion. Due to Covid-19, you can view your credit reports for free weekly through April 20, 2022 by visiting AnnualCreditReport.com.
While reviewing your reports, check to see if all accounts that were discharged after completing bankruptcy are listed on your account with a zero balance and indicate that theyve been discharged because of it. Also, make sure that each account listed belongs to you and shows the correct payment status and open and closed dates.
If you spot an error while reviewing your credit reports, dispute it with each credit bureau that includes it by sending a dispute letter by mail, filing an online dispute or contacting the reporting agency by phone.
How Soon Will My Credit Score Improve After Bankruptcy
You can typically work to improve your credit score over 12-18 months after bankruptcy. Most people will see some improvement after one year if they take the right steps. You can’t remove bankruptcy from your credit report unless it is there in error.
Over this 12-18 month timeframe, your FICO credit report can go from bad credit back to the fair range if you work to rebuild your credit. Achieving a good , very good , or excellent credit score will take much longer.
Many people are afraid of what bankruptcy will do to their credit score. Bankruptcy does hurt credit scores for a time, but so does accumulating debt. In fact, for many, bankruptcy is the only way they can become debt free and allow their credit score to improve. If you are ready to file for bankruptcy, contact a lawyer near you.
Will A High Credit Score Help You During A Bankruptcy
Myth: A clean credit historyone with no late payments or other issuesand a high credit score means youll be less impacted by a bankruptcy.
The truth: Bankruptcy will have a huge negative impact on your credit, and a previously positive payment history doesnt change that. In fact, if you have a higher score, you could stand to lose more than if you already have a low score.
A bankruptcy also temporarily wipes out all the goodwill you might have developed with your timely payments. Some lenders may have rules about offering credit when a recent bankruptcy shows up on your credit historyno matter how good your score used to be.
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Dealing With Your Vehicle
One of the forms you will file with the bankruptcy court is called the Statement of Intention. In this form, you tell the court what you plan to do with property that is securing a debt you owe, like real estate or a vehicle.
If you own your vehicle but are still paying on the loan, you have a few options on how to deal with it in Chapter 7 bankruptcy.
You can reaffirm the debt, keep your vehicle, and continue making payments. This means the debt will not be discharged and you will continue making monthly payments during and after bankruptcy. If you miss future payments the lender will have the right to repossess the vehicle and possibly try to collect on any deficiency between the balance you owe and the amount they get when selling the vehicle.
If you select this option in your Statement of Intention, your car lender will send you a reaffirmation agreement for you to complete and return. In some bankruptcy cases a reaffirmation hearing will be scheduled.
If you choose to surrender your vehicle, then it will be repossessed and the debt will be discharged in your bankruptcy. Filers with high car payments they can’t afford often choose to surrender their car to get out of the debt.
Will A Bankruptcy Ruin Your Credit Forever
No, a bankruptcy will not ruin your credit forever. When you first file for bankruptcy your credit score will take the biggest hit. As the bankruptcy ages, your credit score will improve so long as you responsibly borrow and make timely payments. Also, a bankruptcy only remains on your credit report for 10 years. After the 10 year period, the bankruptcy will be removed and your credit score will increase.
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How Bankruptcy Affects Your Credit Score
When you file bankruptcy, your credit score can be negatively impacted almost right away. In fact, many consider bankruptcy as the worst impact to your credit score, compared to foreclosure and other debt collection actions. But no one knows exactly how much damage certain events, like bankruptcy, foreclosure, a short sale, or deed in lieu of foreclosure will do to your credit. This is due to many factors, such as:
If you have a good credit score, but file bankruptcy anyway, you will probably suffer the most. That is because the higher your pre-bankruptcy score, the bigger the drop in your score after you file bankruptcy. On the other hand, if you already have a low credit score, bankruptcy won’t hurt your score that badly. According to FICO, a person who has a credit score of 680 prior to a bankruptcy loses 130 to 150 points following a foreclosure. But a person who has a credit score of 780 prior to a bankruptcy loses 220 to 240 points. So, if you already have a low score and file for bankruptcy, this could potentially make it easier for you to improve your score post-bankruptcy.
Bottom Line: Bankruptcy And Credit
I have personally seen the impact of the bankruptcy petition on some debtors five to seven years later and most are doing fine, says Arnold Hernandez, an attorney in Tustin, Calif., who handles bankruptcy cases. Bankruptcy is not forever.
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Do Your Homework On Credit Card Offers
One thing that puzzles many people who file bankruptcy is that they receive multiple credit card offers right after their bankruptcy is completed. Youd think that a fresh bankruptcy would be a strong deterrent to lenders.
However, the banks know you wont be able to file again for several years, so you are actually a better risk than you were before. Just make sure to read the fine print on any new debt you apply for, as many companies intentionally prey on people who recently filed bankruptcy by offering new lines of credit stuffed with fees, minimum payments, and extremely high interest rates.
Over time, reports from these debts will start to raise your credit score, provided you use credit cards and rewards wisely by paying by the due date and in full every month. Initially, the only lenders to extend you credit will probably be small banks and credit unions. But, within a few years, you may be able to get approved with the national banks, which is important because big names on a credit report can potentially sway future credit decisions like a home mortgage in your favor.
The passage of time alone will increase your score. Plus, as long as your report is filled with nothing but A+ grades, you should have a decent credit score within a few years, and even a good score by the time the bankruptcy drops off your report.
How Long Does Bankruptcy Stay On Your Credit Report
Myth: Bankruptcy ruins your credit foreveror at least an entire decade.
The truth: Bankruptcies are considered public records, which is how theyre reported on your credit. The public record associated with a Chapter 7 bankruptcy will remain on your credit report for as long as 10 years. That time period starts on the date you file the bankruptcy petition.
Chapter 13 bankruptcyis different. It involves paying some money back to your creditors and typically take three to five years. However, it only stays on your creditfor around seven years from the petition filing date. That means that within two to four years after successfully finishing a Chapter 13 bankruptcy, it will fall off your credit.
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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|
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 then the point-damage may not be that bad. Remember, FICO scores only go down to 300, but its rare to see anything below 500.
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, youre 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:
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.
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Find Out How Bankruptcy Initially Hurts Your Credit Score But Might Help You Rebuild Credit Over The Long
Updated By Amy Loftsgordon, Attorney
Bankruptcy laws were enacted to provide you with relief from your creditors by giving you a fresh start. This fresh start usually comes with a high price, namely, a major hit to your credit. But there are ways that bankruptcy can actually help your credit in the short and long term. This will depend on your , financial circumstances, and other factors.
Other Factors To Consider When Deciding To File Separately
Every financial situation is unique, and there may be factors that contribute to filing without the spouse. A spouse may wish to protect a good credit rating, or a spouse may not have been part of the debt that led to bankruptcy. Just like people, marriages are unique and many factors should be weighed when deciding the best way to approach bankruptcy.
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Can You Get Credit After A Bankruptcy
Myth: You cant get a credit card or loan after bankruptcy.
The truth: Credit cards are one of the best ways to build credit, and there are options out there for those with a checkered credit history. Secured credit cards, which require an upfront security deposit, have a lower barrier of entry but spend and build credit just like a traditional card.
Similarly, there are loans availablesuch as passbook, CD or that are secured with a deposit or collateral and help you build credit as you pay them off. Like secured credit cards, these loans are much easier to come by because the lender is protected in the event you cant pay. Do note that you may need to get permission from the court to take on new debt during a Chapter 13 repayment plan.