What Does Bankruptcy Do To Your Credit Score?

If you had a ton of debt that became unmanageable, you may have filed for bankruptcy for a new start. That said, people often mistakenly believe that they will get a totally clean start after filing for bankruptcy, but when it comes to your credit, the story is more complicated. We will explain what bankruptcy does to your credit in much detail below.

What Does Bankruptcy Do To Your Credit Score?

Although filing for bankruptcy offers a fresh start, bankruptcy is literally the worst thing that you can do for your credit. When a bankruptcy is first reported on your credit report, it will cause significant damage to your credit score, often lowering your credit score by more than 150 points. So, if you care about maintaining a good credit score, you should consider an option other than filing for bankruptcy.

Also, the higher your credit score, the bigger the impact a bankruptcy will have on your credit score. For example, if you have a credit score of 700 or more, a bankruptcy can drop your credit score by more than 200 points. However, if you have a 620 credit score, for example, a bankruptcy can drop your credit score by more than 150 points. So, the higher your credit score, the bigger the drop you will experience.

In the United States, there are two types of bankruptcies that you can file. You have the option for filing Chapter 7 bankruptcy or Chapter 13 bankruptcy.

Chapter 7 bankruptcy involves liquidating (selling) your assets and using the proceeds of the sale to pay off your debt. Of course, most people don’t have enough assets to pay off their debts, and so the courts will often forgive the remaining debts.

Chapter 13 bankruptcy, on the other hand, involves discharging unsecured debt, such as medical bill debt and credit card debt while allowing the filer to restructure and repay the remaining debts without having to liquidate the filer’s assets.

A Chapter 7 bankruptcy remains on your credit report for 10 years from the date that you filed for bankruptcy, whereas Chapter 13 bankruptcy remains on your credit report for 7 years from the date you filed for bankruptcy.

Regardless of which Chapter bankruptcy you file, a bankruptcy will cause significant damage to your credit, however, as the bankruptcy ages, its impact on your credit score will lessen until it’s ultimately removed from your credit report. Once a bankruptcy is removed from your credit report, you will notice a significant boost in your credit score.

Filing Bankruptcy After Defaulting on Your Accounts

Most people who file for bankruptcy have already defaulted on making payments on their credit cards and/or loans and so they have already caused significant damage to their credit.

If you file for bankruptcy after defaulting on several of your accounts, you will notice a smaller drop in your credit score because your credit score has already taken a hit from your previous defaults. The lower your credit score, the less damage a bankruptcy will do to your credit because you’ve already tanked it.

On the other hand, if you file for bankruptcy prior to defaulting on your loans and missing payments on your credit cards, you will likely experience a much larger drop in your credit score when you file for bankruptcy. So, the higher your credit score, the bigger the drop in your credit score when you file for bankruptcy.

Will Bankruptcy Ruin Your Credit Score?

Yes, filing for bankruptcy will destroy your credit score. Filing for bankruptcy is the worst thing that you can do for your credit. If you have a low starting credit score, a bankruptcy will not do as much damage as it would to a good or excellent credit score.

For example, if you have a credit score of 700, you will notice a points drop of up to 200 points, whereas, if you have a credit score of 600, you may notice a point drop of 130 to 150 points.

Can You Get a Credit Card or Loan After Filing For Bankruptcy?

After you file for bankruptcy, negative information will be added to your credit report, making it very difficult to open credit cards and/or obtain loans. Lenders will be very hesitant to lend you money if you have filed for bankruptcy because it shows them that you’ve defaulted on your monetary obligations in the past and are therefore likely to default on making payments to them if they approve you for a credit card or loan.

If a lenders does approve you for a loan or credit card after you have filed for bankruptcy, they will likely approve you at a high interest rate and unfavorable repayment terms.

If you have filed for bankruptcy, the best thing you can do is apply for a secured credit card. A secured credit is very similar to a regular unsecured credit card. The only difference is that you have to pay a security deposit and the security deposit you pay will become your credit limit.

For example, if you place a $500 deposit, you will have a $500 credit limit. If you make timely payments for 12 to 18 months, your secured credit card will be converted into a regular unsecured credit card. A secured credit card will help your credit just as would a regular credit card. So, it’s highly recommended that you open one to improve your credit after filing for bankruptcy.

Can Bankruptcy Improve Your Credit?

Filing for bankruptcy can improve your credit in the long run, however, when you first file for bankruptcy, the bankruptcy will do significant damage to your credit and credit score.

Filing for bankruptcy may help you in the long run because it discharges unsecured debts that you owe, such as credit card debt and medical bill debt. Discharging debts prevents creditors and lenders from continually harassing your for payments. However, it does not remove them from your credit report.

Delinquent accounts will remain on your credit report even though you’ve filed for bankruptcy. However, delinquent accounts will only remain on your credit report for 7 years from the date that you first became delinquent on your accounts.

After the 7 year period, the delinquent accounts will be automatically removed from your credit report and will no longer negatively impact your credit score.

That said, filing for bankruptcy gives you the opportunity to open new accounts, such as a secured credit card to begin rebuilding your credit without having to worry about repaying old delinquent accounts.

Without filing for bankruptcy you will have to worry about and continue trying to make payments on old accounts while being harassed by collections to make payments. Bankruptcy stops all of this, giving you the opportunity to focus on your future.

How Long Will a Bankruptcy Remain On Your Credit For?

The amount of time that a bankruptcy will remain on your credit report depends on the type of bankruptcy that you filed. A Chapter 7 bankruptcy will remain on your credit report for 10 years from the date that you filed for bankruptcy. However, Chapter 11 bankruptcy will remain on your credit report for 7 years from the date you filed for bankruptcy.

After the 7 or 10 year period is over, the bankruptcy should automatically be removed from your credit report, no longer affecting your credit score. That said, as the bankruptcy ages on your credit report, its impact on your credit score will begin to lessen.

Some consumers have reported being able to attain a 700 credit score after 2 years of filing for bankruptcy. So, you’re not doomed if you file for bankruptcy, but it will take some hard work to improve your credit by following the best practices.

To improve your credit after filing for bankruptcy, you should open a secured credit card, use it responsibly, and make all of your payments on time. This should be a solid foundation upon which you can build strong credit.

Credit Score Planet Frequently Asked Questions

1. What happens to your credit after bankruptcy?

After you file for bankruptcy, your credit score will take a hit. The higher your credit score, the more of a point drop you will experience. That said, as the bankruptcy ages, your credit score will begin to recover.

2. Does your credit score go up after a Chapter 7 discharge?

No, after filing for Chapter 7 bankruptcy, most people will experience a significant drop in their credit score.

3. How much does your credit score go up after bankruptcy?

It is highly unlikely for your credit score to go up after filing for bankruptcy. Most people will experience a significant drop in their credit score. People with a 700 or higher credit score often experience a drop of up to 200 points after filing for bankruptcy. While persons with a 600 credit will experience a 130 to 150 drop in their credit score.

4. How long does bankruptcy hurt your credit for?

A chapter 7 bankruptcy remains on your credit for 10 years and a Chapter 11 bankruptcy will remain on your credit report for 7 years. That said, the negative impact of a bankruptcy will lessen as the bankruptcy ages.