One of the biggest concerns people face when filing for bankruptcy is the impact on their credit scores. Will your credit score be damaged forever? How much will it drop?
The Impact of Bankruptcy on Credit Score
It’s hard – or rather impossible – to predict how much your credit score will drop after filing for bankruptcy. Its effect depends on your current credit score status and the information in your credit report.
According to myFICO, individuals with a high credit score can expect a significant drop in their score, compared to someone with a “modest” credit score. Another factor to consider is the number of accounts included in the bankruptcy filing.
FICO also provides a hypothetical scenario for a better understanding of how negative actions affect your credit score. Different actions (late payments, opening new accounts) impact your score differently, depending on what your score is initially. If you have credit problems that have already pulled your score down to the 500 range, you have a slightly lower score to protect.
But this is just one example of what could happen to your credit score. It may not drop as much or it may drop more. You won’t know until you actually file for bankruptcy.
Are All Bankruptcy Cases the Same?
The example provided by FICO does not distinguish between Chapter 7 bankruptcy and Chapter 13 bankruptcy, which are two types of bankruptcy available for personal debts. Chapter 7 bankruptcy concludes quickly, with the discharge occurring a few months after filing (if you qualify). Chapter 13 bankruptcy takes years to complete, as you will be on a repayment plan lasting three to five years.
Bankruptcy Alternatives
While you may be inclined to shy away from bankruptcy based on the potential impact on your credit score, keep in mind that it may be the best option available to you. Debt repayment and relief options include:
- Self-repayment
- Joining a debt management plan through a credit counseling agency
- Consolidation
- Settlement
- Filing for bankruptcy
Among these options, filing for bankruptcy may impact your credit score the most, but it might be the best option if you have limited resources to repay your debts. The first three options may not affect your credit score at all, but they may not be available depending on your income, expenses, and account status.
Rebuilding Credit Score After Bankruptcy
If you decide to file for bankruptcy, know that your credit score is not lost forever. Once you emerge from bankruptcy and stabilize your financial situation, you can focus on rebuilding your credit score. This involves establishing a positive payment history with new creditors or with any accounts that survived bankruptcy. You may be surprised to see credit card offers coming your way shortly after bankruptcy.
Bankruptcy remains on your credit report for up to 10 years, but it impacts your credit score less over time as you add positive information to your credit report. It’s possible to achieve an excellent credit status after bankruptcy, but you have to go through the process first. If you are having difficulties repaying your debts, it may be helpful to temporarily disregard your credit score to redirect your financial matters back on track.
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Sources:
- myFICO. “What are the different types of bankruptcy and how are they viewed by my FICO® credit score?”
- myFICO.
- “How Credit Actions Affect FICO® Credit Scores.”
- Illinois State Bar Association. “Your Guide to Personal Bankruptcy.”
- U.S. Courts. “Chapter 7 – Bankruptcy Basics.”
- U.S. Courts. “Chapter 13 – Bankruptcy Basics.”
Source: https://www.thebalancemoney.com/how-much-will-bankruptcy-hurt-your-credit-score-960061
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