An individual’s credit score is like a snapshot of their financial health. It provides insight into their financial conduct at a glance. A credit score provides an idea of an individual’s creditworthiness, while the other details on their credit report can help show how they use their income and any credit extended to them by financial institutions.
People considering bankruptcy due to overwhelming debt or the threat of creditor lawsuits may worry that bankruptcy could do real damage to their credit scores. What impact does a personal bankruptcy typically have on a filer’s credit report and credit score?
Filing causes a sudden score drop
Individuals who have previously avoided missed payments and other significant blemishes may see their credit scores drop significantly as soon as they file. A drop of 200 points is possible, especially if the filer was previously diligent about paying their accounts on time.
However, a filer’s credit score can rebound relatively quickly after their discharge. They become eligible for secured credit cards and similar opportunities within a few weeks of a bankruptcy discharge.
As they continue using their new lines of credit responsibly, they develop a positive credit history. Their score slowly increases. By the time the credit bureaus stop reporting their discharge, their credit score may actually exceed where it was before they filed. The record of the bankruptcy comes completely off a credit report 10 years after a Chapter 7 discharge or seven years after a Chapter 13 discharge.
While the short-term impact of bankruptcy on a filer’s credit score will be negative, the long-term impact will typically be quite positive. Working with a bankruptcy attorney can help people choose the right type of bankruptcy, maximize the benefits they derive from filing and rebuild their credit rapidly after a discharge.