Home > Bankruptcy > How Bankruptcy Impacts Your Credit Score & How to Recover Show Many people think of bankruptcy as financial Armageddon, the final act in a downward spiral that ends with a judicial order that discharges debt. As bad as bankruptcy is, it doesn’t leave a lifelong black mark on your finances, but restoring your financial good name takes effort as well as time. Bankruptcy is a tradeoff. It wipes away or reduces debt that you can’t afford to pay, but it tells the world that you’re a credit risk. That gets reflected on to your credit score, which can drop dramatically and make it tough to borrow and spend. Getting a credit card, a personal bank loan or a mortgage can be very difficult in the near term, and it can take years before fallout from the bankruptcy to clear. That being said, many people considering filing for bankruptcy already have low scores. In those cases, bankruptcy can actually increase your credit score. This happens because bankruptcy can actually clear negative items from your credit report – leaving only the bankruptcy itself as a negative remark. Before you file bankruptcy, you should understand the consequences. The bankruptcy will be reflected on your credit score for as long as 7-to-10 years depending on the type of bankruptcy you enter. Until the nation’s three large credit-rating bureaus remove the bankruptcy from your credit report, any potential lender will know you filed a bankruptcy. But you can take immediate step to begin restoring your creditworthiness. It’s worth noting that even though the bankruptcy may be noted on your credit report for 7 to 10 years, it doesn’t necessarily impact your ability to obtain credit that entire time. For example, the timeline for chapter 7 bankruptcy is a matter of months, and many people are able to get credit cards shortly after getting a bankruptcy discharge. You can even potentially get a car loan after filing a bankruptcy (although maybe at a high interest rate). A nonprofit credit counsellor can help you plan a strategy if you feel uncertain about what to do. If you follow a strict budget, pay your bills on time and use a secured credit card, the credit rating agencies could elevate your credit score to a solid level within two years. Credit bureaus assign creditworthiness using a numeric scale. The numbers, called FICO scores, range from 300 to 850. The higher your score, the easier it is to get credit and the better the terms will be. Credit card issuers and lenders regularly report your financial behavior to the bureaus, which in turn use formulas to arrive at your score. An assortment of negatives can lower your score, including tardiness in paying bills, using too much of your available credit line, loan defaults, loans that enter collection and, worst of all, bankruptcy. A bankruptcy will lower the score tremendously, and the better your score was before you file, the more it will drop when the bankruptcy order is entered. How much your score falls, and how quickly it recovers, has a lot to do with how you manage your money and your credit. Though the bankruptcy remains a negative on your credit report until it’s removed, you can begin seeing improvement if you make the right moves. Assessing the DamageFICO scores rely on a menu of criteria – the more negatives, the lower your score. Tracking your FICO score has become increasingly easy in recent years as many banks and credit card issuers now regularly post updated scores on their secured websites. For those who prefer getting information directly from the three large credit-rating bureaus, albeit not as quickly, free reports can be requested annually. If you know your score and file for bankruptcy, get ready to watch it plunge. A person with an average 680 score would lose between 130 and 150 points in bankruptcy. Someone with an above-average 780 score would lose between 200 and 240 points. In the end, both people would be tagged risky borrowers, making it difficult or impossible to get loans or unsecured credit. On the other hand, if your score is in the 400s or 500s when you file, it’s possible that your score may experience a boost from the bankruptcy filing. People in this score range have seen credit score boosts as high as 50 points after filing for bankruptcy. Individuals usually file bankruptcy under either of two chapters of the federal bankruptcy code. Chapter 13 stops collection actions and creates a plan for borrowers to partially repay creditors over a fixed number of years. Chapter 7 doesn’t have a repayment plan and eliminates most unsecured debts, meaning the creditors can’t recoup what they advanced. One of the cons of filing chapter 7 bankruptcy is that it will negatively affect your FICO score for 10 years. A Chapter 13 filing, because it involves partial repayment, remains on your record for seven years after receiving a Chapter 13 discharge or dismissal. Bankruptcy’s impact on your credit score will also vary according to how much debt you had discharged and the ratio of positive to negative accounts on your credit report. This is because major credit score factors such as late payments and credit card utilization will be reset. Rebuilding CreditworthinessThough you can’t do anything about the amount of time bankruptcy remains on your credit report, you can take steps that will speed the rate at which your score recovers. First, don’t fall for a pitch from a credit repair company that offers to restore your credit rating for a fee. It can’t be done and anybody who says it can is a scam artist. The only way to begin rebuilding credit is to become a paragon of financial responsibility.
Make Big-Ticket PurchasesYou might try to buy a house after bankruptcy or maybe a car and then discover that no one wants to loan you the money. Even if you can find a loan, it likely will be at very high interest. You shouldn’t take a loan that would be difficult to repay. If you’re buying an auto, avoid shady dealers who operate buy-here, pay-here car lots. Consider asking a relative or good friend to co-sign a loan, which will help lower the interest rate on your loan. Obviously, this is a risk for the co-signer, so finding someone who willing to help might be difficult. If you find a co-signer for either a loan or a credit card, make sure the loan or card issuer reports payments to the credit-rating bureaus. If you pay on time, your credit rating will benefit. It might take years before you can qualify for a big loan at market interest rates, but the fastest way to get there is through financial recovery plan. How many points will credit score go up after Chapter 13 discharge?How much your credit score increases after a bankruptcy is removed from your credit report depends on a number of factors, but many people report increases ranging from 30 to 100 points.
Does your credit score go up after Chapter 13?Based on an improved debt-to-income ratio and restored timely payments to creditors, 65% of your credit score factors are improved through filing Chapter 13 bankruptcy.
Does credit score go up after discharge?Your credit scores may improve when your bankruptcy is removed from your credit report, but you'll need to request a new credit score after its removal in order to see any impact. Credit scores are not included in credit reports. Rather, scores reflect what is in your credit report at the time the score is calculated.
How long does it take to get good credit after Chapter 13?Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy stays on a consumer's credit report for just seven years. In general, though, it takes anywhere from 12 to 18 months to start improving your credit score after your Chapter 13 bankruptcy is discharged.
|