One of the biggest concerns that is raised when it comes to bankruptcy is what will happen to my credit score? Initially, declaring bankruptcy will lower your credit score, and the exact amount will vary based on what your credit score was prior to the filing. There is no set number that the score will drop, but the better your credit score to begin, the more it will drop. Take someone who has a score of 700; after bankruptcy it could drop almost 200 points, while someone with a lesser score of around 600 may only see a 120-point decrease. Reports show that the average credit score after bankruptcy is declared ranges from 530-540. It is possible that if your score remains above 550 that you can even recover to a fair credit score within 12-18 months. But the good news is that the damage to your credit score is not irrevocable.
Credit Scores and Chapter 7
Filing for chapter 7 will be the most damaging form of bankruptcy for your credit score, but it comes with the benefit of having your debts completely discharged. This is possibly the most liberating form of bankruptcy, as you will be free of your prior debts. Once you take chapter 7, it will stay on your credit score for 10 years after the filing as well as the initial hit to your credit score.
Despite the setbacks to your score, chapter 7 may be the best long-term option to your financial situation. When it comes to credit scores, time is on your side. In some cases, you may even see your score start to improve quickly. Over time and with effort, it is possible to get your credit score back to what it was, if not even better. FICO estimates that it takes roughly 5 years after filing bankruptcy to get your credit score back to where it was, if you take proactive steps to improve it. There are benefits associated with declaring bankruptcy that often outweigh the cost of bankruptcy filings. Getting your debt eliminated is possibly the biggest benefit, but you will also stop receiving collection calls and begin to right your financial state. The financial freedom that comes with debt elimination makes the hit to your credit score almost negligible.
Credit Score with Other Types of Bankruptcy
With all other forms of bankruptcy, the initial impact on your credit score will be the same, but on your credit report it will only appear for 7 years after the filing. Chapter 13 is possibly the most common of these types, and recovery from chapter 13 can be quick. Unlike chapter 7, chapter 13 will not discharge your debt, but re-structure it into more manageable amounts and payments. This can help get your credit score back up as you will have manageable debt to make payments on. Combined with other credit re-building strategies, it is common to see credit score reach normal levels with a lesser amount of time than with chapter 7.
Re-Building Credit Scores
There are many steps you can take to fix credit scores after bankruptcy, from getting secured lines of credit and secured credit cards to taking out new loans. However, the most important thing to remember is that whatever you take out to re-build the score, you need to ensure the payments are being made. Start small, with secured lines of credit, and as your score grows you can begin to carry larger debts. If you have any debts that were not discharged, be sure to continue making payments on those as well. Also, be sure to monitor your progress and keep track of how you are doing. Once the bankruptcy falls off your credit score, be sure to check the reports to make sure it is eliminated.
People who are contemplating bankruptcy should not stress over the credit score portion of declaring bankruptcy. In most cases, the stress of collector’s calls and tight finances alone make it worth it to declare. There is also the chance that your credit score will be damaged none the less by simply failing to make payments. Many people also fear that they will be unable to purchase items they need like a home or a car because of their credit score. At Holland Law, we have established networks that can help individuals get back on their feet and make the purchases you need. If you are contemplating if bankruptcy is right for you, be sure to contact us for an evaluation of your situation.