How will bankruptcy affect my credit score?
One of people’s biggest fears of filing for bankruptcy is affecting their credit scores. Will your credit score be destroyed forever? How small will it be?
Impact of Bankruptcy on Credit Score
Credit has become such a basis in our lives that living without good credit can be a huge nuisance. People are so afraid of losing good credit – even their average loan – that they struggle with the long months or years and still end up filing for bankruptcy.
Unfortunately, there is not much good news about your credit score when it comes to bankruptcy.
It is difficult – or better yet impossible – to predict exactly how much your credit score will fall after you go bankrupt. The impact on your credit score is largely based on where your credit is now and what information is on your credit report.
In 2010, FICO released information on how bankruptcy and other credit errors affect your credit score. Using a false scenario with two different credit profiles, FICO showed that bankruptcy could cost up to 240 points for someone with 780 credit points and 150 points for someone with 680 credit points. Although the person with the higher credit score loses the most points, in both cases the individual credit scores end up in the same place, 540 and 530. If the credit problems have already taken your credit score out of 500, you have a little less credit score for protection.
But, this is just an example of what could happen to your credit score. Yours may not drop as much or it may drop more. You won’t know unless you remember.
Are all bankruptcies the same?
The FICO example is no different between chapter 7 and chapter 13 bankruptcy, two types of bankruptcy available for personal debt.
Chapter 7 bankruptcy will be almost the fastest, and discharging happens a few months after you apply (if you qualify). It will take several years to complete Chapter 13 bankruptcy, as you will be on a three to five year repayment plan.
While you may be facing bankruptcy because of the potential impact on your credit score, keep in mind that this may be the best of all available options. Options for debt repayment and taxation include:
- You pay for it yourself
- Entering a debt management plan through a credit counseling agency
- Bankruptcy filing
Of these, filing for bankruptcy is likely to hurt your credit score the most, but it may be the best option if you have limited resources to repay your debt. The first three options may not affect your credit score, but these options may not be available depending on our income, costs and the status of your accounts.
Revive your credit after bankruptcy
If you decide to file for bankruptcy, know that your credit is not lost forever. When you are out of bankruptcy and your finances are back on track, you can focus on rebuilding your credit score. This involves building a positive payment history for new creditors or any bankruptcy survivor accounts.
You may be surprised to see how quickly you start getting a credit card offer again after bankruptcy.
Bankruptcy stays on your credit report for up to 10 years, but it affects your credit less than time and when you add positive information to your credit report. It is possible to get excellent credit status after a bankruptcy, but first you have to go through the process. If, of course, that is the best option.