After bankruptcy, your credit score can plummet. So, carefully consider your credit rating before you file for bankruptcy. Bankruptcy will have a devastating impact on your credit health. The exact effects will vary. But according to top scoring model FICO, filing for bankruptcy can send a good credit score of 700 or above plummeting by at least 200 points. If your score is a bit lower—around 680—you can lose between 130 and 150 points.
That said, people with good to exceptional credit scores will see the most notable impact of bankruptcy. If your credit score is already fair or poor—below 670—you may not see large point drops. Yet, the result will still be a very low credit score. You simply don’t have as many points to lose to fall to that very poor rating.
Do All Bankruptcies Have Equal Impact?
The type of bankruptcy you file and the amount of debt you need to get rid of have varying effects on your credit score.
What happens to your credit score after Chapter 7 and Chapter 13?
Consumers and small business owners usually choose from two types of bankruptcy filings—7 and 13. These are chapters in the federal bankruptcy code.
- Chapter 7: This option is designed to liquidate, or sell off, your non-exempt assets or valuable property. The proceeds are used to discharge, or wipe out, your debt. In most cases, debtors don’t have enough non-exempt assets to repay their debt. But the court discharges those bills anyway. Chapter 7 is reported on your credit report for up to 10 years.
- Chapter 13: With this option, you can discharge some of your debt, like medical bills. Meanwhile, you can also partially repay other debts—like a home mortgage or car loan—over a three to five-year period. The three major credit bureaus include Chapter 13 bankruptcy on your report for up to seven years.
Of the two options, Chapter 7 has the more negative impact on your creditors. That’s because you make no repayments. So, financial institutions view you as a higher credit risk. Your score may take a bigger hit with Chapter 7 because of this negative impression.
With Chapter 13, you’re making good on some or all of your debt. So, it isn’t reported on your credit report for as long as Chapter 7. Also, you may give future lenders a bit more of a desirable impression of your credit worthiness due to this payment history. This can translate to a slightly more beneficial outcome for your credit rating.
What bankruptcy debt discharges do to your credit
The number of debts and amount you discharge also impact your bankruptcy credit score. Defaulting on several accounts with large balances has more effect than low debt elimination. Your credit history may also play a role if you have positive accounts as well as negative ones. Whether the ratio between these accounts is high or low can make some difference in your score.
Overall, these factors don’t carry much weight for your credit score after bankruptcy, though. The bankruptcy itself and how recently you filed are the most important things that credit agencies and lenders consider. No matter how high your credit score was before a bankruptcy, there will be a noticeable drop immediately after filing. But over time, the impact lessens.
Though Chapter 7 stays on your report for up to 10 years, the debt you discharge may go away sooner. That’s because most negative accounts fall off your report seven years or so after any final payment or activity. But some Chapter 13 debts may show up on your report after the bankruptcy drops off. That’s due to the three to five year repayment time frame. The seven-year period doesn’t start until the account becomes inactive.
How Soon Can You Improve Your Credit Score After Bankruptcy?
Some people mistakenly believe that getting rid of a debt will help their credit rating. So, they think their credit score might increase after bankruptcy discharge. Unfortunately, making regular debt payments is the only method that could improve your credit. But, you can still start working on raising your credit score immediately after a bankruptcy.
Your score won’t go up right away. But the sooner you get started on good credit habits, the sooner the impact will show on your report.
Your low post-bankruptcy credit score doesn’t mean you can’t get some forms of credit. However, it will be more difficult and the terms will likely be expensive. Your best option is a secured credit card. Responsible use and timely payments can help you down the road to a better credit score.
Rebuilding Your Credit After Bankruptcy
After a bankruptcy, there are many things you can do to improve your credit. You should start by making sure that your bankruptcy has been reported correctly. You need to pull your credit reports to check on your bankruptcy debt discharges. They should be marked as discharged and show zero balances.
Next steps include establishing new credit and paying your bills. When obtaining new credit, stay within your means. Only take on debt that you are financially able to pay off responsibly. You should also track your credit reports and credit score regularly.
Start Improving Your Credit After Bankruptcy Today
To eventually raise your credit score after Chapter 7 or Chapter 13, you must stay aware and alert about your credit usage. Check your credit with Credit.com’s free credit report card. This provides you with a point of reference as you start rebuilding your credit.
Stay on top of your credit usage and how it’s reflected on your credit report. Access convenient tools that allow you to do this quickly and easily. Be smart and responsible with your finances. Then check on how your efforts are paying off with timely credit score monitoring.