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WHAT HAPPENS TO YOUR CREDIT
The answer to that question really depends on where you start. If you have a good credit score, filing for bankruptcy will definitely damage it. Those with good credit should expect a huge drop in their score immediately after filing for bankruptcy.
If your credit score is already low before you file for bankruptcy, then bankruptcy will cause only a modest drop in your score.
According to 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.
If your credit score is already fair or poor—below 650—you may not see large point drops.
Does Chapter 7 or Chapter 13 Have the Same Impact on Credit?
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. A Chapter 7 bankruptcy is reported on your credit for 10 years from the date of filing.
With Chapter 13, you’re repaying a portion of your debt. Due to this, it is not reported on your credit report for as long as Chapter 7 (reported 7 years). 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.
HOW DO THEY CALCULATE YOUR CREDIT SCORE?
• 35% payment history
• 30% amounts owed
• 15% length of credit history
• 10% credit mix
• 10% new credit
Your payment history and the amount of debt you owe make up over half of your credit score. Most people have already damaged their credit score because of missed payments and too much debt by the time they make the decision to file for bankruptcy relief.
The amount a credit score drops when a person files bankruptcy depends in part on the credit score at the time of filing. If you have a low credit score, filing bankruptcy won’t lower your credit score as much as someone with a high credit score. In either case, the damage is temporary, and it can be repaired.
Can Filing Bankruptcy Help My Credit Score Get Better?
Filing bankruptcy helps improve the “amounts owed” portion of your credit score by discharging unsecured debt. The balances on the discharged accounts become zero which helps improve this portion of the credit score.
In addition, creditors cannot continue to report late payments on debts that are discharged thereby helping to improve the payment history portion of the credit score. Month after month, the payment history improves without additional late payments being reported by creditors.
By not filing bankruptcy, you prolong the time it takes to improve your credit score. If you don’t pay your debts, creditors continue to report late payments and other negative information. Even if you begin paying the debt, the negative information remains on your credit report for years.
When you stop creditors from reporting negative information, the steps you take to improve your credit score going forward count more than they would if they had to battle the continued reports of negative information.
Most bankruptcy clients see their credit score increase to a “good score” within 12 months after comng out of their bankruptcy cases.
For clients who are looking to purchase a home, most are able to do so within about 24 months coming out of their bankruptcy case.
Tips for Improving Credit Scores After Bankruptcy
In addition to filing bankruptcy, you can take steps after your bankruptcy case closes to improve your credit score.
• Make all future payments on debt on or before the due date to avoid the creditor reporting late payments. One or two late payments can severely lower your credit score, and it takes much longer to undo that damage than it does to cause the damage.
• After your bankruptcy case is closed, apply for a secured credit card. You must place a deposit with the credit card company; however, using the credit card and making timely payments will help improve your credit rating. Verify that the company does report account information to the credit bureaus.
• Don’t close old credit accounts. If a company does not close an account that had a zero balance, leave the account open. Use the account a few times and pay the balance in full. An old account helps to improve your length of credit history.
• Avoid applying for new credit. It may be tempting to apply for credit cards once your bankruptcy case is completed; however, applying for too many new accounts lowers your credit score in addition to placing you in danger of getting back into debt.
• Request copies of all three credit reports and review each report carefully. Notify the credit reporting agency in writing of the error and request that the company corrects the error immediately. Keep copies of all information.
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