Yes, filing bankruptcy will have a negative impact on your credit score but it might be less harmful than sustaining a foreclosure or other debt collection actions. However, you can recover, and filing bankruptcy might improve your credit score more rapidly than doing nothing at all.
Bankruptcy and Your Credit Score
If you have a good credit score and you are forced to file bankruptcy, then your score is going to be left struggling. Obviously, a high credit score is going to plummet when you file bankruptcy. However, if your score is already dismally low due to debt collections and missed payments than you probably won’t see as significant of an impact on your score.
FICO shows that if you have a 680 credit score prior to filing bankruptcy and you sustain a foreclosure then your score will drop by as much as 130 to 150 points. However, if you have a credit score of 780 and you decide to file bankruptcy to stop struggling with debt then your score will drop by as much as 220 to 240 points.
Basically, if your score is low going into bankruptcy then you’ll probably find it easier to repair your score post-bankruptcy then if you had a high score. However, increasing your score isn’t going to happen overnight. It’s going to take time, dedication, and work to start repairing the damage.
Bankruptcy and Your Credit Score
Sometimes you have no choice but to file bankruptcy even if it will impact your credit score negatively. If you are facing a pending wage garnishment or mortgage foreclosure, then there is probably no way around taking BK action. You will need the relief of bankruptcy to stay afloat. In such situations, you need to think that in time filing bankruptcy will help your credit score. Once you have wiped the slate clean then you can again rebuild your credit. A bankruptcy stays on your credit report for ten years, but your score can start to climb again almost immediately after filing if you take baby steps to rebuild.
Will All Types of Bankruptcy Impact Your Credit Score?
- Chapter 7: Liquidate or sell off non-exempt assets and valuable property. The proceeds obtained are put towards clearing your debt. In most cases, a debtor will not have enough to discharge or clear their debt so the court will discharge the bills. If you choose to file Chapter 7 bankruptcy, then it will stay on your credit report for 10 years.
- Chapter 13: You can discharge some of your debt using Chapter 13 such as medical bills but still repay other debts such as your home mortgage. A Chapter 13 bankruptcy stays on your credit report for up to 7 years. It is popular if you want to save your home but discharge your other debts.
Chapter 7 always has a far greater negative impact on your credit report than a Chapter 13. The reason why Chapter 7 is so hard on the report is that you will make no repayments of the debt you owe so financial institutes will see you as an extremely high risk to trust with future debt. Your credit report will take a hard hit with a Chapter 7.
Positive Effects of Bankruptcy on Your Credit Report
Bankruptcy can offer short term positive effects on your credit report.
- Rid your report of delinquent accounts: Your report might show late payments and many credit balances that are high. Bankruptcy will get rid of the late payments and wipe out the high credit balances on your report. Your entire report is wiped clean of all debt. The accounts will no longer reflect the status of ‘delinquent’. In many cases, getting rid of these negatives on your credit report can even boost a horrifically low score.
- Improve your debt-to-credit ratio: The amount you owe makes up to 30 percent of your FICO score. It reflects the amount of debt and available credit that you are using. With bankruptcy, your debt-to-credit ratio will improve. If you have lower debt, then your FICO score increases. Having little or no outstanding debt gives you a more favorable rating.
- Start over with bankruptcy: Wiping out your debt via bankruptcy lets you start over and get your finances corrected. You can budget your money and create a firm foundation for future credit success.
After you file bankruptcy, you will want to start re-establishing your credit quickly. Typically, you’ll find it easier to create a more favorable credit report because you will have more disposable income so your payments will always be made on time.
Fair Fee Legal Services
8665 South Eastern Avenue, Suite 101
Las Vegas, Nevada 89123