Can My Credit Score Improve After Bankruptcy?

By Daisy Rogozinsky
/
June 28, 2022

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. 

What Is a Credit Score?

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. 

How Bankruptcy Impacts Your Credit Score

Bankruptcy significantly lowers your credit score, and the higher it is, the more it will drop. For example:

  • People with a score of 680 (considered average) will lose between 130 and 150 points
  • People with a score of 780 (considered above-average) will lose between 200 and 240 points

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.

Can Credit Scores Improve After Bankruptcy?

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. 

How to Improve Your Credit Score After Bankruptcy

There are a number of steps that you can take to improve your credit score after filing for bankruptcy. Some of these include:

  • Pay any bill you receive before the due date. Don’t fall behind on any payments, especially on accounts you still have from before your bankruptcy filing.
  • If you filed for Chapter 13 bankruptcy, make your court-ordered payments as part of your repayment plan on time
  • Open a secured credit card account and make payments on it on time. Try to remain disciplined with your credit card usage and not buy anything you won’t be able to pay off.
  • When you can, open an unsecured credit card
  • Make a budget to help you avoid accruing further debts
  • Try to build an emergency fund so you never have to run up your credit card balance higher than what you can pay off, even in the event of an emergency
  • Keep paying your student loan payments on time
  • If you can afford to pay it off, consider taking a credit-builder loan offered by community banks and credit unions to help you improve your score

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. 

How Long It Takes to Improve Your Credit Score After Bankruptcy

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.

Conclusion

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.

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