The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
Filing for bankruptcy can offer relief from overwhelming debt, but it will also have severe and long-lasting effects on your credit. Bankruptcy can remain on your credit report for seven to 10 years, and your score may take a significant hit in the immediate aftermath.
Rebuilding your credit after bankruptcy is possible, but it is often very difficult. Lenders may be hesitant to provide you with loans or credit cards, and securing low-interest funding can be challenging.
Learn how bankruptcy affects your credit, how bankruptcy appears on your credit report and what you can do to rebuild your credit afterward.
Key takeaways:
For anyone asking, “What is bankruptcy?” know that it’s a double-edged sword; on the one hand, you could free yourself from debt you had no possibility of paying back. On the other hand, filing for bankruptcy will make creditors feel less confident about their ability to repay borrowed funds.
Here are some of the immediate effects that bankruptcy can have on your credit:
Because bankruptcy comes with serious financial consequences, it’s important to weigh the advantages and disadvantages before proceeding. In most cases, filing for bankruptcy requires legal assistance—so it’s a good idea to contact an attorney and financial advisor to see whether your specific circumstances make bankruptcy a wise choice.
If you follow through on filing for bankruptcy and have your debt discharged, ensure you clearly understand how that decision will affect your credit score and credit report for years to come.
Myth: Having debt discharged through bankruptcy offers a complete financial reset.
Truth: In fact, while bankruptcy removes the obligation to pay debt, lasting effects can damage a person’s credit for years.
The most common scoring model is provided by FICO®, which can drop after a bankruptcy notation. The impact of bankruptcy on credit scores varies from person to person; depending on your previous credit history, you could see a modest or a massive drop in your score.
Here are a few general rules to keep in mind when considering how your score may be affected by bankruptcy:
Although it’s hard to predict exactly how your score will be affected by anything, there are ways to estimate the impact of filing a bankruptcy.
First, find out your current credit score, which is provided for free by many banks and financial apps.
Second, use the myFICO Score Estimator, which asks 10 questions to determine a rough score range. You can answer some of these questions hypothetically—like saying that you’ve filed for bankruptcy—to see how your score changes.
Your credit score is not a fixed number. With time and responsible credit usage, you can often raise your score, enabling access to credit with lower interest rates.
Myth: There’s a specific credit score drop associated with bankruptcy.
Truth: Actually, the severity of a score drop depends on various factors, like a person’s current credit score and previous negative items.
Bankruptcy discharge is part of the public record, and it appears as a negative item on your credit report. As a result, when a lender views your credit report via a hard inquiry, your bankruptcy notation will be visible.
That said, the Fair Credit Reporting Act (FCRA) has specific guidelines for how long bankruptcies remain on your credit report.
Since Chapter 7 and Chapter 13 function differently, lenders may view the two types of bankruptcy differently when making decisions about new credit. Specifically, while Chapter 7 bankruptcy discharges most debt without payment, Chapter 13 establishes a payment plan, which a potential lender could consider more favorable.
Regardless of whether you’ve filed for bankruptcy, regularly checking your credit report is a good habit. Everyone is entitled to a free credit report every year from each of the three credit bureaus: Equifax®, Experian® and TransUnion®.
Occasionally, credit reports include false or misleading information. For example, if there’s an error on your report after seven to 10 years, it helps to know how to remove a bankruptcy from your record. Should a bankruptcy show up on your credit report in error, you can file a dispute with a 609 letter to potentially have it removed.
Looking over your credit report can also give you clues about how to work to rebuild your credit after bankruptcy.
Myth: A bankruptcy remains on your credit report forever since it’s part of the public record.
Truth: While bankruptcy remains an item in the public record, it’s only noted on a credit report for seven to 10 years.
Even though bankruptcy can take a significant toll on your credit, it is possible to rebuild your credit with time and a few key habits.
Try to stick to the following strategy when rebuilding your credit after bankruptcy:
While rebuilding credit can be difficult, it is important to remember that the damaging effects of bankruptcy and other negative items diminish over time. Consistent and responsible use of credit will start to outweigh the effects of your bankruptcy—and eventually, the bankruptcy will leave your credit report entirely.
Whether you’ve already had your bankruptcy discharged or you’re just exploring the possibility, know that you can always rebuild your credit. Lexington Law Firm’s focus tracks can help you find your footing after major life events. You can also sign up for a free credit assessment for an in-depth look at your credit situation.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
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