How Does Bankruptcy Affect a Credit Score?

What is Bankruptcy?

Bankruptcy is a legal process in which a debtor expresses his inability to pay his financial responsibilities. In the United States, consumers typically have two bankruptcy options: Chapter 7 and Chapter 13. With Chapter 7, the debts are written off and no longer have to be paid. However, the creditors may take back any property that was securing those debts. With Chapter 13, debtors work with the courts to reorganize their debt so they can repay what they owe over the course of 3 to 5 years.

Bankruptcy on Your Credit Report

When you file for bankruptcy, the debts do not simply disappear as if they never existed. Your history of late or missed payments, if you have one, will remain on your credit report and will continue to drag down your credit score. Additionally, the bankruptcy will stay on your record for many years. A Chapter 7 bankruptcy will remain on your credit report for 10 years from the date of the filing. Chapter 13, on the other hand, will stay on your record for 7 years after the repayment is completed. As long as the bankruptcy is listed on your credit report, it will have a negative impact on your credit score.

Bankruptcy and Credit Scores

Because your credit score is based on a number of factors, the negative impact a bankruptcy may have on your score varies. For example, if you already have a low score because of other credit problems the consequences of filing bankruptcy may not have a significant impact. Some creditors may even begin to actively approach you because they know more of your income is likely to be freed up from debt thanks to the bankruptcy. However, if you have a good credit score with only minor blemishes, you may see a more noticeable drop in your credit score.

Lessening the Damage

You can minimize the credit score damage caused by a bankruptcy in a couple of ways. For one, you can renegotiate with some of your creditors. This means you can continue paying on certain debts, such as your home or your car. By maintaining some of these accounts, you will not have to re-establish credit. Remember, you earn credit score points for the length of time you maintain open accounts. Also, check your credit report to make sure your accounts are accurately being listed as part of a bankruptcy proceeding. Otherwise, these accounts may have a double impact on your score because they will count against you on their own and as part of the bankruptcy. Finally, begin rebuilding your credit responsibly. New accounts can also help improve your credit score.