Filing for bankruptcy is undoubtedly a difficult decision. But while formally declaring that you’re incapable of paying your debts may be the best way out of your current money woes, you’ll want to consider — or at least understand — what it can do to your credit. As you’ve probably guessed, bankruptcy can do some big damage to your credit scores and it will likely stay on your credit report for quite some time. Luckily, there are ways to slowly repair your credit after you file. Here are three things to expect regarding your credit score after bankruptcy — followed by some tips to help you rebuild your credit-standing.
1. Bankruptcy Can Cause Your Credit Score to Plummet
There is no way to underestimate the impact a bankruptcy has on your credit. It is one of the worst things you can do to your scores. The exact effects will vary, but according to major credit scoring model FICO, bankruptcy can make your a good credit score (think 700 or above) to plummet by 200 points or more. Meanwhile, a less stellar credit score of 680 will drop about between 130 and 150 points.
2. A Bankruptcy on your Credit Report Causes Long-Term Damage
Having bankruptcy information listed on your credit report will impact your credit for quite some time. That’s because the public record of a Chapter 7 bankruptcy stays on your credit report for 10 years. Any other bankruptcy references remain in your credit file for seven years including:
- Chapter 13 public record items
- Any accounts included in a bankruptcy
- Third-party collection debts, judgements and tax liens discharged through a bankruptcy
3. The Negative Impact on Your Credit Diminishes Over Time
When rebuilding your credit after a bankruptcy, remember that time is on your side. Bankruptcy information will be considered in your credit scores for as long as it appears on your credit report, but its impact on your score lessens over time. In fact, you may even see your score start improve a bit shortly after the bankruptcy hits your report. That’s because you technically no longer owe the debts that got discharged, which could help your credit utilization rate (how much debt you’re carrying versus your total credit limits). FICO estimates that it would take roughly 5 years for a person with a 680 credit score at the time of the bankruptcy to return to that score — assuming they start instituting better credit practices, of course.
Once the bankruptcy information is removed from your credit report altogether, it will no longer factor into your credit scores.
Rebuilding Credit After Bankruptcy
To rehabilitate your credit after a bankruptcy, consider taking the following steps:
- Check that the bankruptcy was reported correctly. Pull your free credit reports via AnnualCreditReport.com and be sure that all the debts that were part of the bankruptcy filing are marked as discharged and with a zero balance.
- Get a new starter line of credit, like a secured credit card or credit builder loan to build a new positive payment history. You can do so by making on-time payments on that credit card or loan account and keeping your debt levels low.
- Monitor your progress. You can see how you are doing as you work to rebuild your scores by using Credit.com’s free credit report snapshot.
Finally, you’ll want to make sure that the bankruptcy and any items related to it are removed from your credit reports as soon as you hit that 10-year or 7-year mark.