The Effects Of Bankruptcy On Your Credit Score

Nobody really wants to file for bankruptcy, but sometimes it is the right decision to make. Taking formal steps to show that you are no longer able to pay your debts can help you resolve your immediate financial worries. However, you do have to understand what the impact of those formal steps will be on your credit rating.

“A bankruptcy will always be considered a very negative event by your FICO score. How much of an impact it will have on your score will depend on your entire credit profile.”

It is inevitable that your credit score will decline as a result of the bankruptcy, and it is highly probable that it was already damaged due to the financial situation that made you consider or even file for bankruptcy. That being said, there are three main things that are likely to happen to your credit score, all of which can be fixed with patience and dedication.

1. Your Score Will Drop Significantly

If you file your bankruptcy, you will always end up having “bad credit”. If your FICO score was 700 or higher, which is a good score, it will likely drop by at least 200 points. If it was already not as good, for instance, at 680, it will likely drop by some 150 points. The type of bankruptcy you file for will also have an impact.

“Depending on the kind of bankruptcy you file, Chapter 7 vs Chapter 13 bankruptcy, your credit score will decrease anywhere from 160 to 220 points.”

2. The Damage Is Long Term

Your credit score will be affeccted for a long time by a bankruptcy. A Chapter 7 filing, for instance, stays in place for 10 years. Others, such as a Chapter 13, your included accounts, and discharged liens, judgments, or collection debts, will stay in place for seven years.

3. The Impact Diminishes with Time

The good news is that, as time goes by, the negative effects of a bankruptcy on your credit score will lessen. This goes quite quickly, in fact, because you will no longer owe any money on any discharged debt. This improves your credit utilization rate.

“The credit utilization ratio is the amount of outstanding balances on all credit cards divided by the sum of each card’s limit, and it’s expressed as a percentage. Credit issuers like to see a credit utilization ratio of approximately 35% or less.”

According to FICO, if your credit score was 680 when you filed for bankruptcy, it should be back at 680 within five years, presuming you got your financial behavior in order.

How to Rebuild Your Credit

If you want to rebuild your credit after you have filed for bankruptcy, you will need a great deal of patience to start with. However, you also need to be proactive and take steps to make things better. As such:

– Check your credit file to see whether the bankruptcy has been listed properly. There are numerous ways of checking your credit report for free and you need to take advantage of that to see whether all the debts have been marked as discharged and balanced at zero as agreed.

– Start over. Open a credit builder loan or a secured credit card, which are good starter lines of credit. This will give you the opportunity to show a positive payment history. Make your payments on time and keep the level of debt as low as possible.

– Keep checking your credit file. You should see it start to improve slowly but surely as time goes by and as you prove yourself to be financially stable.

– Check back after 10 (or seven) years to make sure all the elements relating to your bankruptcy have been removed.