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  • Writer's pictureMarc Primo

How Does Bankruptcy Affect Your Credit Score

Updated: Apr 3, 2020

The following is an article “How Does Bankruptcy Affect Your Credit Score”

by Marc Primo.

The main reason people avoid filing for bankruptcy is that it is synonymous with failure in most of our minds. The second reason would be it has negative effects on our credit score. A bankruptcy can stay on your credit report for up to ten years and can take your score down about 200 points. So it is not a surprise that anyone would be inclined to avoid it. The truth is it can be a very smart move depending on the situation. Sure it will affect your credit but so would defaulting on your debts.

The importance of a good credit score differs from person to person. If you will need good credit in any point in the future then this is a decision you need to think through. Financial institutions use credit as a main marker in deciding whether or not to approve your home loan or extend your credit line. Employers may even use your credit to decide whether or not you are a good fit for the job.

The best way to fix your credit after a good hit is time, and some don't have that luxury. Ultimately if you file for bankruptcy and handle new debts well, with time, your credit will grow to a healthy status before the ten years are up.

Chapter 13 vs. Chapter 7

Chapter 13

Chapter 13 bankruptcy will only stay on your credit report for 7 years but the discharged debts may stay on the report longer.

Chapter 7

A chapter 7 bankruptcy will stay on your report for up to 10 years. The upside is the debts involved will be removed from the credit report before the bankruptcy. The older the bankruptcy and any debt associated with it get the less they can affect your credit score. As they say, time heals all wounds.

How to deal with your credit score after a bankruptcy

Check Your Credit Score Constantly.

There is a misconception that checking your credit score will hurt it. This is only true for hard checks. Hard checks are only used when you apply for loans or are about to buy a home. Soft checks have no effect on your score and should be used to keep a close eye on your number. Many companies offer a soft check for a low monthly price Chase bank even includes a weekly credit check free with any of their credit cards or products. If you recently filed for bankruptcy it will be more important than ever to constantly check your score. Keep a list of your debts and check how they appear on your credit report. If you filed for Chapter 7, they should appear with a balance of $0 and no longer have a delinquent status after a few months.

Get back on the horse.

It is important to start creating healthy credit as soon as possible after the bankruptcy is filed. Since your credit will have taken a hit here are some options to keep playing the credit game in a safe way and speed up its recovery.

Secured Credit Cards.

The bank will ask you to back up this credit card with a sum of money as collateral. You will be issued a credit card with a credit limit that is equal to or lower than the collateral. These cards don't have the greatest benefits and come with fees that you need to be aware of, but as a temporary solution to rebuilding your credit, they are a great option.

Store Credit Cards.

Almost every store out there now issues credit cards that incentivize using them in their store chains such as Sears, BestBuy, even Amazon will issue you a credit card. These cards have a lower score requirement and as such will carry higher interest rates and fees so make sure you keep up to date with your payments.

Get a new car.

No, I am not kidding. Sure, you just filed for bankruptcy and getting a new car might be irresponsible in the eyes of those around you. The fact of the matter is that getting approved for a car loan is extremely easy even more so if you can give a reasonable down payment. This loan will help fix your score if you keep up to date with the payments.

Don't close old saving accounts or open new ones.

Chances are that before the bankruptcy your credit was pretty good. Staying active in long held accounts can help credit health. Credit history is considered as much as anything else so the older you credit is, the better. We want you to apply for new credit cards and loans just not many and not all at once. Keep your financial activities spread out and sensible. Avoid opening new accounts. Instead, try and make good use of the ones you have had for years. This shows responsibility.

Yes, bankruptcy is something we all want to avoid, but it is not the end of the world. The most significant effect it should have besides your ego being crushed is on your credit score. If you consider these tips you should be able to bounce back from it in a few years and live as if nothing ever happened. In the end, it is all about consistency and responsibility.


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