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How does filing bankruptcy impact my credit?

On Behalf of | Oct 10, 2023 | Bankruptcy

They say there is no such thing as a free lunch. It’s an expression that means there are tradeoffs for every good thing in life.

Consumer bankruptcy is no exception. You can file Chapter 7 or Chapter 13 bankruptcy to discharge or reorganize your debts to get you and your family back from the brink of financial catastrophe. Filing for bankruptcy puts a temporary stop to debt collector harassment and foreclosure proceedings. But there are other, less-than-positive consequences for bankruptcy protection.

What bankruptcy can do to your credit score

One of these is the hit bankruptcy could put on your credit score — though it does not affect everybody the same way. Someone with an average credit score of around 680 will lose about 130-150 points after bankruptcy appears on their credit reports. Someone with an above-average score could lose as much as 240 points. A bankruptcy filing usually puts a consumer with average to above-average credit into a zone where they would have trouble getting credit at standard interest rates. However, someone with a poor credit score — like many people considering bankruptcy have — could actually see an increased score after bankruptcy.

Not a permanent hit

Also, this effect won’t last forever. A bankruptcy filing lasts seven to 10 years on your credit history. And once your bankruptcy proceeding is complete, it is often possible to get approved for credit cards and even auto loans again, though at worse terms than you used to get. Meanwhile, you can start rebuilding your credit through methods like:

  • Making all your monthly bills and bankruptcy payments on time, if not early.
  • Obtaining a secured credit card, which is backed by money you deposit into an account. As you use it and make payments, it will demonstrate your creditworthiness.
  • As your credit score starts to improve, opening an unsecured card, likely one with a low maximum, to further build your credit. Use it wisely and pay it off every month.

Bankruptcy has major consequences, both good and bad. You should weigh your options for debt relief carefully before making a decision.