Bankruptcy can offer a significant measure of relief to people struggling to get out from under mountains of debt. However, it is not without its consequences. One of the main downsides to filing for bankruptcy is its effect on your credit score. By significantly damaging your credit score, bankruptcy can make it difficult for you to be able to get new loans or lines of credit in the future. But it doesn’t remain that way forever. In this article, we’ll explore the effect that bankruptcy has on the credit score and how long it takes to bounce back afterward.
Organizations called credit bureaus have a practice of rating consumers based on credit worthiness on a numeric scale. This score, called a FICO score, ranges from 300 to 850. The higher your credit score, the easier it will be for you to get loans and credit.
Your credit score changes based on your financial behavior, which is reported by lenders and credit card companies to credit bureaus. There are a number of things that can lower your credit score, with bankruptcy being the worst.
Bankruptcy significantly lowers your credit score, and the higher it is, the more it will drop. For example:
Both of these scores would drop low enough for the consumer to be tagged a “risky borrower,” which would make it very difficult to get loans or unsecured credit.
However, if your score is in the 400s or 500s when you file, bankruptcy could actually boost your credit score by as much as 50 points.
The exact impact of bankruptcy on your credit score will ultimately vary depending on how much debt you had discharged and the ratio of positive to negative accounts on your report. This is because late payments and credit card utilization will reset, which are both major credit score factors.
If your credit score is low after your bankruptcy filing, you’re probably wondering if you can get it up again. Thankfully, managing your money and credit properly can help your credit score recover. The bankruptcy will not remain on your credit report forever, and you can take actions to get it to increase even while it is still there.
There are a number of steps that you can take to improve your credit score after filing for bankruptcy. Some of these include:
One thing that you shouldn’t do is work with a credit repair company offering to restore your credit rating for a fee. These are scams and will not work.
Chapter 7 bankruptcy will remain on your credit report for ten years, while Chapter 13 will remain for seven years because it involves partial repayment. However, you can get your credit score to go up sooner than that by following the steps listed above. It is generally understood that it takes between one year to one and a half years to begin to improve your credit score, assuming you take all of the right actions.
If fear that your credit score will be decimated is keeping you from filing for bankruptcy even though you need the relief, you’ll be happy to hear that it is possible to improve your credit score after filing for bankruptcy. Bankruptcy will disappear from your credit reports after a certain number of years but, even before then, you can improve it in the relatively short time span of 12 to 18 months simply by practicing good financial habits.