Between 2006 and 2017, there were a total of 12.78 million bankruptcies filed for nonbusiness. The number has started to fall from highs of 1.54 million in 2010 to 767,721 in 2017. Bankruptcy is often a person’s last resort when they have no other options left to pay off their debts.
Bankruptcy can help people get out of insurmountable debt, but it will have a lasting impact on their credit scores.
As a consumer, your credit score will dictate how or if you’ll be able to get a loan from a financial institution. Without a good credit score, you may not be able to get a mortgage or will have to pay higher interest rates on loans.
Effectively, a credit score determines the risk to the lender when lending money to a consumer.
If you file for bankruptcy, how will your credit score be impacted?
Bankruptcy Will Be Added to Your Credit Report
Your bankruptcy isn’t kept a secret. Lenders will know of your bankruptcy, and this will effectively “stain” your credit for a period of time. If you file for Chapter 7 bankruptcy, the bankruptcy will remain on your report for a period of 10 years.
All other forms of bankruptcy will remain on your report for seven years.
The bankruptcy is public knowledge, and it will definitely be considered when a credit inquiry is made.
Bankruptcy Will Impact Your Credit Score
Let’s assume that you have a 720-credit score. You have been paying your debts responsibly, and all of a sudden you lose your job and bankruptcy is your only option. Well, guess what? All of those years of being responsible mean nothing because you can expect your credit score to plummet 200 points when filing for bankruptcy.
You’ve now went from a low-risk borrower to a high-risk borrower with a 520-credit score. The good news is that when the debt is discharged, your credit score may also rise somewhat from the 200-point loss.
Credit utilization will drop, and this may have a positive impact on your score.
So, while you may have had your score fall to 520, it will recover slightly, although not fully, after a bankruptcy.
Bankruptcy Will Require You to Rebuild Your Credit
Credit scores have fallen, and you’re not able to get a loan from any reputable lenders. The impact is still new, but time helps the impact of a bankruptcy fade. Time is on your side, and while the damage is long-term, it does start to fade.
It’s up to you to start rebuilding your credit, and this should be done by first checking your new credit report. Make sure all aspects of the bankruptcy were filed properly. Once you’ve done this, it’s time to get a new line of credit.
A secured credit card is often best.
Make payments over time and start building up a positive payment history. Along the way, monitor your progress and know that the negative impacts of the bankruptcy will fall off of the report over time. The further you’re away from bankruptcy, the more your score will rise and creditors will begin trusting you again.
