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How Much Does Bankruptcy Affect Credit Score

6 min read

How Much Does Bankruptcy Affect Credit Score – Our customers are often very concerned about their credit score. That’s normal, and honestly, so are we. I check my credit score at least once every two weeks. It is a point of pride for many people. For others, however, it can be the difference between getting ahead in life or not being able to afford the things we need.

We have some very good news to share for people concerned about the impact bankruptcy will have on their credit score. The good news is, and I say it boldly;

How Much Does Bankruptcy Affect Credit Score

That’s right. You’ve been lied to all these years by people who have no idea what they’re talking about. Tell yourself that if you go bankrupt, your finances are in order and you’re dead in the water. You will never get a loan again. We’ve all heard it and it usually comes from the slimeball who charged you 97% interest on a $2,500 car loan.

Bankruptcy Explained: Types And How It Works

We didn’t just agree with that, even though we already knew it was true, according to a report from the Consumer Financial Protection Bureau. The study you can read here is completely legitimate and has been researched for 17 years. Another finding from the study is

Creditors and all their hacking friends are shouting from the rooftops that bankruptcy will destroy your credit score. The data shows just the opposite. In fact, there is usually no dip in your score after submitting. The overwhelming number of people who file for bankruptcy see an IMMEDIATE increase in their score. Don’t believe us, just read what the CFPB says:

The median scores for Chapter 7 filers recover more quickly than those for Chapter 13 filers, possibly because of the much faster and more likely discharge of Chapter 7 files.

When it comes to your financial health, let’s make one thing clear. Your credit score is a vastly inadequate indicator of your financial health. What really matters is your balance.

Will Filing For Bankruptcy Affect My Credit Score?

In the grand scheme of loans and credits, lenders look at your balance sheet as much or more than they look at your credit score. Essentially, they look at your net worth, which consists of assets minus liabilities. If you remove the liabilities you have from bankruptcy, your assets will look even better.

A credit score is just a number, most banks prefer a measure called Debt to Income Ratio or DTI. When you wipe out unsecured debt, your DTI also drops, increasing your chances of being approved for a loan.

You can take actions that increase your score. One of the best ways to do that is to check your credit report. Not just your score, but also what’s in your report. If you look at credit reports, you will notice that credit reports are notoriously inaccurate. Nearly 1 in 4 credit reports contained factual inaccuracies that could negatively impact your credit score. That’s why it’s very important to check your credit report often, even more than your score itself.

Just because you can go bankrupt doesn’t mean you should. It’s just one of the things you need to keep in mind if you find yourself needing to file. There are many different factors that influence whether you should file for bankruptcy. We discuss these factors in one of our recent blog posts

Credit Score After Bankruptcy

If you are ready to discuss your bankruptcy with an experienced bankruptcy attorney, contact our office today for a free, no-obligation consultation. Filing for bankruptcy can have a significant impact on your credit score, causing it to come with a serious financial setback. Upon submission, you will likely see a sharp drop in your score, especially if it was previously high. The impact is twofold: immediate and long-term.

Bankruptcies stay on your credit report for seven to 10 years, depending on whether you filed for Chapter 7 or Chapter 13 bankruptcy, which can hinder your ability to obtain loans or credit in the future.

While it is possible to rebuild your credit over time, the road to recovery after bankruptcy is often long and challenging.

Immediately after declaring bankruptcy, you can expect your credit score to drop sharply. This is especially true if you had a relatively high credit score before bankruptcy. Declaring bankruptcy is considered a last resort and that is why it has such a strong negative impact.

What Will My Credit Score Be After Bankruptcy

The long-term impact of bankruptcy on your credit score is significant. Bankruptcies can remain on your credit report for seven to 10 years, depending on the type. This lingering sign can make it more difficult for you to get credit in the future.

The different types of bankruptcies can also have different consequences. Chapter 7 bankruptcy is generally more damaging to your credit score than Chapter 13 bankruptcy because it involves liquidating assets and failing to repay debts, while Chapter 13 involves a repayment plan.

This is often called “liquidation bankruptcy” and involves selling your non-exempt assets to pay back your creditors. This type of bankruptcy can be quite difficult and is usually chosen when there is no realistic possibility of paying off the debts that have accrued.

Companies often use Chapter 11 bankruptcy. It allows companies to continue operations while restructuring their debts and payment plans under court supervision.

What Affects My Credit Score

Chapter 13 bankruptcy, also known as a “wage earner plan,” allows individuals with regular incomes to develop a plan to repay some or all of their debts.

Your credit score is a numerical expression that reflects your creditworthiness and is an essential element that lenders take into account when applying for loans or credit cards.

It is determined based on the information in your credit report, and while different models weigh factors differently, the general categories that affect your credit score are very standard. These are the most important factors:

Your payment history is one of the influencing factors that typically make up 35% of your FICO score.

How Will Bankruptcy Affect Your Credit Score?

It includes the history of paying your bills on time, late payments, the frequency of these delays, and any delinquencies or defaults.

Lenders look at your payment history to determine if you have been responsible for credit in the past. Late or missed payments can significantly lower your credit score.

Credit utilization refers to how much of your available credit you are using. It accounts for about 30% of your FICO score.

If you are using a high percentage of your available credit, lenders may see this as a sign that you are overdrawn and may have difficulty making repayments. A lower credit utilization ratio is better for your credit score.

Common Myths About How Bankruptcy Affects Credit

The length of your credit history makes up about 15% of your FICO score. This factor takes into account the age of your oldest account, the age of your newest account, and the average age of all your accounts.

It also includes the length of time since various accounts were last used. A longer credit history can positively impact your credit score.

The credit mix takes into account the different types of credit you use or have used in the past, including credit cards, student loans, car loans and mortgages. It consists of 10% of your FICO score. Lenders like to see a mix of loans, because it shows that you can deal with different types of debt.

New credit refers to recently opened credit accounts and questions about your credit from lenders, also known as ‘hard’ questions.

How Does Bankruptcy Affect The Economy?

Bankruptcies are listed on your credit report as a matter of public record, which can significantly damage your creditworthiness in the eyes of lenders.

If you have filed for bankruptcy, it will show up in the public records section of your credit report. Each account included in the bankruptcy is also marked as such. These notes inform future creditors that the debt has been discharged through bankruptcy.

Bankruptcy information can remain on your credit report for up to ten years for Chapter 7 and up to seven years for Chapter 13, after which it should automatically disappear from your report.

The extensive presence of bankruptcies on your credit report can limit your access to credit and possibly even impact employment and housing options.

How Does Bankruptcy Affect Your Credit? Bankruptcy & Credit Management

While the impact of bankruptcy on your credit score is serious, it’s not the end of the road. With time, patience, and responsible financial management, it is possible to repair your credit score.

After bankruptcy, it is crucial to minimize any further negative effects on your credit score. You can do this by making sure bills are paid on time, avoiding accumulating more debt, and building your credit gradually using a secured credit card or loan.

Bankruptcy should be a wake-up call to handle your finances more carefully. Budgeting, living within your means, and building an emergency fund are crucial steps to avoid future financial crises.

The road to credit score rehabilitation is not a quick one, but with diligent effort you can start making improvements within a few years.

What Is A Good Credit Score?

Small, manageable lines of credit, paid off consistently, can show lenders that you are a reliable borrower, gradually building your credit score.

The effects of bankruptcy on credit scores are significant and multi-faceted, representing a significant financial setback. Upon filing, an immediate drop in credit score is almost inevitable.

This is followed by long-term effects, where bankruptcy records remain on your credit report for seven to 10 years, affecting future credit applications.

The road to recovery is difficult, but possible, with an emphasis on responsible financial management and punctual billing

Bankruptcy & Your Credit Score

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