How Does Bankruptcy Affect Your Credit?
If you are considering filing for personal bankruptcy, there’s a fairly decent chance your credit score isn’t looking so hot right now. On the bright side, that means bankruptcy won’t necessarily do extensive damage to your score because it’s likely in rough shape as it is. In fact, a recent study by LendingTree found there may be light at the end of the tunnel. Looking at loan terms offered to over a million anonymized LendingTree users in 2017, analysts found 43 percent of filers had a credit score of 640 or higher within a year of filing bankruptcy. Within two years of bankruptcy, that figure jumped to 65 percent.
There are two types of bankruptcy available to individuals: Chapter 7 (liquidation) bankruptcy and Chapter 13 (reorganization) bankruptcy. No matter which kind of bankruptcy you file, it will be recorded as a negative event on your credit report. The bankruptcy can stay on your credit report for seven or 10 years, affecting your credit score and the terms you are offered when you borrow.
Below we break down how filing can affect your credit score right away, and in the years that follow.
The effects of bankruptcy your credit score
Since filing for bankruptcy is generally a marker of a consumer who is a borrowing risk for creditors, it’s sure to cause some kind of damage to a consumer’s credit score. That doesn’t mean you’ll never qualify for another loan or improve your credit — in fact, the opposite is true.
Read on to learn how much damage you can expect and how to rebuild after taking a hit to your credit score.
Credit score after Chapter 7
With a Chapter 7 bankruptcy, you’ll have your assets liquidated to pay off your debts and debts discharged. The entire process generally lasts about six months, so you will be able to start rebuilding sooner than you might have if you filed for Chapter 13.
A Chapter 7 bankruptcy will remain on your credit report for up to 10 years. As time passes, the bankruptcy will have less of a negative impact on your credit score. While it’s there, you may find it difficult to borrow and do other things that generally require a credit check like:
- Get credit
- Purchase a home using a mortgage
- Finance a vehicle
- Rent an apartment
- Get a job
Credit score after Chapter 13 bankruptcy
If you file Chapter 13 bankruptcy, you will agree to a court-approved payment plan to repay your debts. The repayment plan will last three to five years, at which point you may have your debts discharged.
After filing, you can expect to see the bankruptcy on your credit report for up to seven years, but it will have less of a negative impact over time. While the bankruptcy is on your credit report, you may find it difficult to borrow and do other things that generally require a credit check like:
- Get credit
- Purchase a home using a mortgage
- Finance a vehicle
- Rent an apartment
- Get a job
How big of a drop should one expect?
How much your credit falls will depend on where you stand prior to bankruptcy. The better your credit score, the larger you can expect to see it drop after filing for bankruptcy. The more accounts you have impacted by bankruptcy, the bigger impact you can expect to see on your credit score.
It’s more likely than not if you’re considering bankruptcy, your score may already be comparatively low, so the filing may not cause it to drop by much more.
How can I minimize the credit drop?
The best you can do to minimize a drop in your credit score is stay on top of the accounts affected by the bankruptcy filing. Check your credit report to make sure only the accounts that were part of the bankruptcy are reported with a bankruptcy status, so you aren’t unnecessarily penalized. You can track your credit for free at My LendingTree.
In addition, don’t wait for the bankruptcy to fall off on its own. If it’s still on your report after the 10- or seven-year mark passes, contact the three credit bureaus and attempt to have the bankruptcy removed or purged from your credit report.
Which bankruptcy filing is easier to recover from?
Because you repay your debts under Chapter 13 bankruptcy, the bankruptcy should be removed from your credit report three years earlier than it would under a Chapter 7 filing.
How long bankruptcy stays on your credit report
Chapter 7: 10 years
Chapter 13: seven years
Depending on which you file, a bankruptcy can stay on your credit report for up to 10 years. Chapter 7 filings should fall off after 10 years from the filing date. Chapter 13 filings are removed in seven years after the filing date because you paid back some of the debts owed.
If you want to see the bankruptcy removed from your report, you will just have to wait out the time. You cannot have a bankruptcy filing removed from your report prematurely because it’s public record, meaning it’s a record that’s required by law to be made and kept since the filing was done in court and is a public action.
Once your debts are discharged, both the accounts and the bankruptcy public record should note the discharge on your credit report. But the accounts and record will show until the time passes and they become eligible for removal. After seven or 10 years, the bankruptcy record should be automatically removed from your credit report, without you having to intervene.
If after seven or 10 years from the filing, you notice the filing is still showing on your credit report, you can file a dispute to have it removed from your credit report. You would need to file a dispute with all three major credit reporting bureaus — Experian, Equifax and TransUnion.
Filing a dispute to have the bankruptcy removed
First, you should request a copy of and double-check your credit reports through the three major credit reporting bureaus. If the bankruptcy is still on there, you should see it in the section with other public record information like civil judgments and tax liens.
In your bankruptcy filing, you should have a form that lists all of the debts included in the filing. You should also have received documentation of the discharge when your debts were discharged. When you file a dispute to update the information, you should send each reporting agency a dispute letter; include a copy the list and documentation of discharge.
When disputing information on a credit report, the Federal Trade Commission recommends consumers clearly identify the item they want to dispute on the credit report and request it be removed or corrected. The agency also recommends you send a letter by certified mail, “return receipt requested,” so that you are notified and can record the credit reporting agency received your dispute.
The credit bureau then has to investigate your dispute within 30 days. The agency may contact the court to verify the information in your dispute.
This is the same process you would go through to correct any inaccuracies on your report related to the bankruptcy filing or if you find a fraudulent record of bankruptcy on your credit report.
It’s important to note if you had any accounts that were delinquent prior to filing bankruptcy, they may disappear before the bankruptcy does. Delinquent, or past due accounts, are removed from your credit report seven years after the date the account becomes delinquent. If an account was already delinquent at the time you filed, you might see it removed from your report earlier than the bankruptcy record.
How to rebuild your credit score after bankruptcy
The sooner you start rebuilding your credit after filing for bankruptcy, the sooner your FICO score will rebound and you can get back to good standing.
Here are steps you can take to help build your credit back from the ground up.
Open a secured credit card
A secured card is a tool you can use to build credit when you have no credit or a low credit score. You will be required to put down a deposit to secure the line of credit, which minimizes risk to the lender and makes it possible for borrowers with less stellar credit to qualify. You may receive a credit limit either equal to or greater than the limit on the secured card. As you use the card and make payments on the balance, your activity is reported to the credit reporting agencies, which can help to rebuild your score. Both positive and negative information will be reported, so while the secured card can be helpful if used responsibly, the method could backfire if you fall behind on payments and the negative information is added to your credit history.
Open a regular credit card
After you have successfully used a secured credit card for a time, your score may improve to the point where you can qualify for a regular credit card, although you may not qualify for the most favorable terms. You may only qualify for a card with a high APR or one that charges an annual fee, making it expensive to borrow or carry a balance.
Use a credit card responsibly by keeping your balance below 20 percent of your credit limit and paying off the balance in full each statement period so that there will be positive activity in your credit report.
Pay on time and in full
If you are able to qualify for a credit, it’s imperative you prioritize making your payments on time as your payment history comprises 35 percent of your FICO credit score In addition, the amount of your overall credit limit you are using up, or your credit utilization ratio, accounts for 30 percent of your score. To make a significant positive impact when building your credit score, it’s best practice to try to keep your balances low — less than 20 percent of your credit limit — and pay off the balance in full each statement cycle if possible.
Apply for a credit builder loan
A credit builder loan operates similarly to a secured credit card in that the loan is secured, which minimizes risk to the lender. When you use a credit builder loan, you can build up savings and your credit score simultaneously. You’ll make a payment each month to the lender, and those funds will be placed in an account for you. After the “loan” is repaid, you’ll get your money back, minus any fees or interest paid to the lender. As you pay back the loan, your activity is reported to the credit reporting bureaus, helping improve your credit score.
Filing for bankruptcy will no doubt weight down your credit score as long as the bankruptcy record remains on your credit report, but it doesn’t prevent you from working to build your score after the fact. Our LendingTree study concluded there is no indication that people who are in recovery after filing for bankruptcy will have a more difficult time accessing credit than those who did not file for bankruptcy. As your score improves with time you may find you are again able to qualify for personal loans, mortgages and credit cards on favorable terms.
If you are struggling with a mountain of unmanageable debts, filing for personal bankruptcy can be a great way to get a fresh financial start and rebuild your credit score over time.