What Happens to Your Credit Score after Bankruptcy?

Bankruptcy can happen to anyone—despite their best efforts. And while most people understand that bankruptcy is generally bad for them, many don’t realize the details of how it can impact you. Read below to find out what happens to your credit score after bankruptcy and what you can do to repair your credit afterward.

What Happens to Your Credit Score after Bankruptcy?

After bankruptcy, your credit score can plummet. It will have a devastating impact on your credit health. The exact effects will vary, depending on your credit score and other factors. But according to top scoring model FICO, filing for bankruptcy can send a good credit score of 700 or above plummeting by at least 200 points. If your score is a bit lower—around 680—you can lose between 130 and 150 points.

That said, people with good to exceptional credit scores will see the most notable impact of bankruptcy. If your credit score is already fair or poor—below 670—you may not see large point drops. Yet, the end result will often still be a very low credit score. You simply don’t have as many points to lose to fall to that very poor rating.

Additionally, lenders may hesitate to lend to you if there is a bankruptcy on your credit report.

Do All Bankruptcies Have Equal Impact?

The type of bankruptcy you file and the amount of debt you need to get rid of have varying effects on your credit score.

What Happens to Your Credit Score after Chapter 7 and Chapter 13?

Consumers and small business owners usually choose from two types of bankruptcy filings—7 and 13. These are chapters in the federal bankruptcy code.

Chapter 7: This option is designed to liquidate, or sell off, your non-exempt assets or valuable property. The proceeds are used to discharge, or wipe out, your debt. In most cases, debtors don’t have enough non-exempt assets to repay their debt. But the court discharges those bills anyway. Chapter 7 is reported on your credit report for up to 10 years.
Chapter 13: With this option, you can discharge some of your debt, like medical bills. Meanwhile, you can also partially repay other debts—like a home mortgage or car loan—over a three to five-year period. The three major credit bureaus include Chapter 13 bankruptcy on your report for up to seven years.

Of the two options, Chapter 7 has the more negative impact on your creditors. That’s because you make no repayments. So, financial institutions view you as a higher credit risk. Your score may take a bigger hit with Chapter 7 because of this negative impression.

With Chapter 13, you’re making good on some or all your debt. So, it isn’t reported on your credit report for as long as Chapter 7. Also, you may give future lenders a bit more of a desirable impression of your credit worthiness due to this payment history. This can translate to a slightly more beneficial outcome for your credit rating.

What Bankruptcy Debt Discharges Do to Your Credit

The number of debts and amount you discharge also impact your bankruptcy credit score. Defaulting on several accounts with large balances has more effect than low debt elimination. Your credit history may also play a role if you have positive accounts as well as negative ones. Whether the ratio between these accounts is high or low can make some difference in your score.

Overall, these factors don’t carry much weight for your credit score after bankruptcy, though. The bankruptcy itself and how recently you filed are the most important things that credit agencies and lenders consider. No matter how high your credit score was before a bankruptcy, there will be a noticeable drop immediately after filing. But over time, the impact lessens.

Though Chapter 7 stays on your report for up to 10 years, the debt you discharge may go away sooner. That’s because most negative accounts fall off your report seven years or so after any final payment or activity. But some Chapter 13 debts may show up on your report after the bankruptcy drops off. That’s due to the three to five year repayment time frame. The seven-year period doesn’t start until the account becomes inactive.

How Soon Can You Improve Your Credit Score after Bankruptcy?

Some people mistakenly believe that getting rid of a debt will help their credit rating. So, they think their credit score might increase after bankruptcy discharge. Unfortunately, making regular debt payments is the only method that could improve your credit. But, you can still start working on raising your credit score immediately after a bankruptcy.

Your score won’t go up right away. But the sooner you get started on good credit habits, the sooner the impact will show on your report.

Your low post-bankruptcy credit score doesn’t mean you can’t get some forms of credit. However, it will be more difficult and the terms will likely be expensive. Your best option is a secured credit card. Responsible use and timely payments can help you down the road to a better credit score.

How to Rebuild Your Credit Score after Bankruptcy

While the details of your bankruptcy may remain on your credit report for up to 10 years, this doesn’t mean you have to wait that long to rebuild your credit. There are steps you can take to restore your credit score after bankruptcy.

Over time, your credit score will start to rise if you’re handling credit responsibly. In fact, you may notice an increase in your credit score in as little as 18 months. This increase may be enough to help you obtain some forms of credit, such as a credit card or auto loan, even with bankruptcy on your credit report.

Here’s a look at several steps you can take to start rebuilding your credit score after bankruptcy.

1. Check and Monitor Your Credit Report and Score

It’s important to check and monitor your credit report and score after a bankruptcy. Start by requesting a free copy of your credit report from the three major credit bureaus. Next, check to make sure all the information listed is correct. For example, make sure every account included in your bankruptcy now reports a zero balance. Once you make this initial assessment of your credit report, use a service, such as Credit.com’s Free Credit Score, to regularly monitor your credit.

2. Dispute Any Inaccuracies

If you find any inaccuracies on your credit report, be sure to file a dispute with the credit reporting agency. This includes any accounts under your bankruptcy that don’t show a zero balance. The credit dispute process can take 30 to 45 days to complete, but it’s an important step to take. In many cases, you can complete the dispute process yourself, but you can also seek help from a reputable credit repair service company if necessary.

3. Make On-Time Payments

If you’ve had a bankruptcy, it’s more important than ever to be sure you’re making on-time payments. Building a history of on-time payments can help restore your credit score and show lenders you’ve taken control of your finances. If you haven’t done so already, create a budget to help manage your money. This step can ensure you always have enough funds available to pay your bills on time and help you set up an emergency fund.

4. Make Your Phone and Utility Payments Count

You may not realize it, but your phone and utility payments aren’t usually included in your credit report. Even if you pay these bills on time every month, it won’t impact your credit score. After bankruptcy, you need to make sure you get credit for every positive step you take.

Fortunately, there are services available, such as Credit.com’s ExtraCredit®, that help you report these payments to your credit report. Be sure to sign up for one of these programs as soon as possible.

5. Pay Down Debt

If you have any credit accounts that weren’t part of your bankruptcy, make sure you continue to repay these loans as quickly as possible. Do your best to pay off at least 70% of this outstanding balance to bring your credit utilization rate under 30%. For larger credit accounts, such as student loans, paying off 70% right away may not be possible. In these cases, making your regular monthly payments is enough to start rebuilding your credit score after bankruptcy.

6. Obtain a Secured Credit Card

Once you start rebuilding your credit, you may qualify for a secured credit card. This type of credit card requires you to put down some type of security, typically cash. Regularly using this credit card and making on-time payments is a good way to start repairing your credit. After a year or so of making on-time credit card payments, you may qualify for an unsecured credit card.

7. Control Spending

If out-of-control spending led to your bankruptcy issues, take the time to get control of your spending. Set a strict budget that allows you to pay all your bills plus set some money aside each month for savings. Once you start rebuilding your credit, resist the urge to open too many credit accounts. Instead, only open credit accounts that fit your budget.

8. Apply for a Credit-Building Loan

You can also consider taking out a credit-building loan. Typically, these are smaller loans for amounts such as $500 or $1,000, and they come with a set repayment schedule. These loans are specifically designed to help rebuild your credit. You may find credit-building loans available at smaller community banks and credit unions.

Start Improving Your Credit after Bankruptcy Today

To eventually raise your credit score after Chapter 7 or Chapter 13, you must stay aware and alert about your credit usage. Check your credit with Credit.com’s free credit report card. This provides you with a point of reference as you start rebuilding your credit.

Stay on top of your credit usage and how it’s reflected on your credit report. Access convenient tools that allow you to do this quickly and easily. Be smart and responsible with your finances. Then check on how your efforts are paying off with timely credit score monitoring.