How Bankruptcy Affects Your Credit Score
If you are drowning in debt, then you have a few options on the table, including bankruptcy. This process allows you to get relief from those overwhelming financial burdens. However, filing for bankruptcy does come at a cost. Your credit score will likely suffer as a result of this action.
At Belsky & Horowitz, LLC, we know that this can be a difficult decision, but it is not the end of the road for your credit. With the proper steps, you can file for bankruptcy and take steps to repair your credit. How does bankruptcy affect your credit score? Let’s look at these issues.
What Is the Immediate Impact of Bankruptcy?
Credit scores are designed to assess the risk you pose to lenders, according to the Federal Deposit Insurance Corporation (FDIC). When you file for bankruptcy, that can be a major red flag. After filing, you will notice a substantial drop in your credit score. In most cases, a bankruptcy filing can drop your score anywhere from 130 to 230 points.
However, the exact number will depend on your score prior to the filing. If you had a high credit score before bankruptcy, the drop would be more severe than that of someone with already poor credit.
Most people will choose to file either Chapter 7 or Chapter 13. Depending on the filing, they can affect your credit score differently.
With Chapter 7 bankruptcy, you will need to liquidate your non-exempt assets to pay off creditors. Most of the time, people choose these options when they may not have the financial means to pay off their debts. Chapter 7 will stay on your credit report for 10 years from the filing date.
On the other hand, with a Chapter 13 bankruptcy filing, you will need to set up a repayment plan over the course of three to five years to pay off part or all of your debt. Since you are making a good-faith effort to pay off your debt, this type of filing will only stay on your record for seven years.
Bankruptcy on Your Credit Report
Unfortunately, if you are looking to keep the matter private, that will not happen with a bankruptcy filing. These legal processes are public records, and the credit bureaus will have access to that information. Also, any lender or creditor will view your credit file and see the bankruptcy filing. The accounts discharged in the proceeding will be marked as “included in bankruptcy,” showing that those debts were forgiven or are being repaid under the bankruptcy process. Those discharged accounts will also stay on your credit report for up to seven years.
Accessing Credit After Bankruptcy
As you can imagine, accessing any new credit after bankruptcy will be extremely difficult. Since you have emerged from the process, lenders and creditors will now see you as a risk. They will be unwilling to extend credit to someone with financial instability.
If you can get credit, it will not be on favorable terms. You can expect higher interest rates and low credit limits. Fortunately, over time, if you start to show more financial responsibility, you may be able to receive better credit and loan offers.
Rebuild Your Credit
While bankruptcy will immediately impact your credit score, the good news is that you can begin rebuilding after your case is discharged. One of the best ways to start down the path of recovery is to pay your bills on time. Remember that payment history does make up a large portion of your credit score. If you can show that you are making timely payments, that can help to rebuild your credit.
Along with that, you will want to keep your credit utilization low. Keep that rate below 30% of your total credit limit. For example, if you have a credit limit of $1,000, you will want to keep your balance below $300.
As you progress through this journey, always track your progress as you work to rebuild your credit. Many websites allow you to look at your credit score or report for free. But if you want to stay informed, you may choose to pay for a credit monitoring service from Equifax, Experian, and TransUnion. When you are checking these reports, make sure that all information is accurate.
After bankruptcy, you may receive offers for credit products with extremely high interest rates or predatory terms. While accepting these offers may be tempting, they can often trap you in a cycle of debt, and you might end up back in the same situation. If you need credit, you might want to focus on low-risk options from reputable lenders, such as secured credit cards or credit-builder loans.
Unfortunately, rebuilding your credit is not an overnight process. It will take time and patience. In most cases, you can start to see an improvement in about one to three years. If you can continue to make sound financial decisions, the impact of the bankruptcy on your credit score will diminish.
With patience, discipline, and the right strategy, you can emerge from bankruptcy with a stronger financial future.
Yes, bankruptcy can immediately impact your credit score, but it is not the end of your financial journey. There are steps to take to get you back on the road to solid financial health. Consulting with a skilled and knowledgeable bankruptcy lawyer in Maryland can help you discover the right options for your financial future.
