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How Does Bankruptcy Affect Your Credit?

Updated on:
Content was accurate at the time of publication.

Bankruptcy cases can remain on your credit report for up to 10 years, limiting your eligibility for future loans. Before proceeding, you should understand how bankruptcy affects your credit score and overall finances.

Here’s a closer look, including tips for rebuilding your credit afterward.

How long does a bankruptcy stay on your credit? The answer varies based on the type of bankruptcy you filed. Furthermore, different aspects of bankruptcy affect your credit score and credit report differently.

Credit score and bankruptcy

Lenders use your FICO Score to determine your level of creditworthiness. A high score typically allows you to borrow larger amounts with competitive interest rates, while a low or bad credit score might limit your financing options.

Five factors make up your FICO Score:

  • Payment history (35%)
  • Amounts owed (30%)
  • Length of credit history (15%)
  • New credit (10%)
  • Credit mix (10%)

If you had an inconsistent payment history before the bankruptcy, your score might not drop drastically after filing. For example, a 680 credit score could fall by 150 points after bankruptcy. In comparison, someone with a 780 score could possibly lose 240 points.

Furthermore, a bankruptcy discharge could eliminate your remaining debt, thus improving your score’s “amounts owed” portion.

While predicting what will happen to your credit score after bankruptcy is tricky, know that you will likely experience a negative impact to your credit score.

Credit report and bankruptcy

Information regarding your credit activity and current credit profile is filed in your credit report. This includes payment history and the status of your loans and credit card accounts.

Your credit report will list a bankruptcy under the “public records” section. References to your bankruptcy (or multiple bankruptcies, if applicable) may also appear within the “account information” section, depending on whether your creditors report specific accounts in the bankruptcy.

The length of time that a bankruptcy stays on your credit report depends on the type of bankruptcy you filed. There are six types of bankruptcy, but Chapter 7 and Chapter 13 are the two most commonly used by consumers.

Chapter 7 bankruptcyChapter 13 bankruptcy
  • Most of your property is liquidated, meaning it’s sold to raise funds to pay your outstanding debts.
  • You reorganize your debts by entering into a monthly repayment program. These programs last three to five years and must receive approval from the bankruptcy court.
  • You don’t have the option to exclude any debts, such as holding onto a credit card or keeping certain creditors out of the filing.
  • You may be able to retain your property if you complete the repayment program.
  • Typically falls off your credit report 10 years after filing.
  • Typically disappears from your credit report seven years after the bankruptcy is complete (which can itself take three to five years).

In the end, a damaged credit report is what might limit borrowers from obtaining more credit. Even with a decent FICO Score, creditors are wary of anyone with a bankruptcy listed on their report.

Rebuilding credit after bankruptcy

While the bankruptcy period can feel interminable, remember that it doesn’t last forever. The more time that elapses, the less influence the bankruptcy has on your score — even if it hasn’t come off your report yet. And once the bankruptcy is removed from your credit report, you can take active steps to improve your credit score.

Here are a few tips to follow as you rebuild your credit after bankruptcy:

Look into credit builder loans

A credit builder loan is a personal loan in which the lender deposits the funds — typically a small amount such as $500 or $1,000 — into a savings account for the borrower. The borrower won’t be able to access the funds until the “loan” is repaid, via monthly payments against the principal and interest.
The repayments typically last six month to two years, and the interest rates can range from 0% up to 15% or more.

Once the loan is repaid, the borrower receives the full amount, plus any earned interest, in a lump sum. Make sure the lender reports payments to the credit bureaus before signing the loan contract — this is an important step in rebuilding your credit.

Use a credit repair company

A reputable credit repair company can provide support and assistance in rebuilding your credit after bankruptcy. They will negotiate with creditors and credit bureaus on your behalf to remove negative marks and resolve issues, allowing you to move on.

The Credit Repair Organization Act (CROA) oversees credit repair companies, offering certain protections along the way. For example, if a credit repair company doesn’t provide what they promised, you can seek legal action against them.

It’s important to research potential credit repair companies thoroughly to ensure you’re not falling for a credit repair scam. Unfortunately, many companies prey on those with bad credit.

Get a secured credit card

A secured credit card offers a new line of credit to borrowers who can provide a cash deposit in advance. The cash acts as collateral in case you can’t repay what you borrow.

A secured credit card company will report your activity to the credit bureau, helping strengthen and improve your credit score in the process.

Keep a close watch on timely payments

You may not be able to discharge all obligations through bankruptcy. For some things — like student loans, child support, alimony and certain fines and taxes — it’s crucial to continue making timely payments throughout your bankruptcy. The same goes for any accounts that remain after the discharge.

Remember, payment history accounts for about 35% of your FICO Score. You can’t change the past, but making timely payments can help boost your credit.

Learn from the experience

The federal bankruptcy code requires credit counseling as part of a bankruptcy petition. While it may seem like a hassle, the tools provided, like budgeting tips, can be useful in becoming more financially responsible.

You’ll want to be careful about taking on new debt and instead focus on living within your means. Doing so will ensure you’re adequately prepared in case another desperate financial situation strikes again.

For more information on getting back on your feet financially, check out our guide about recovering after bankruptcy.