THE GOOD, THE BAD, AND THE UGLY

How bankruptcy affects your credit report

WRITER: CIELE EDWARDS

Bankruptcy is a last resort when financial pressures become too intense to manage. Depending on which type of bankruptcy you file, this process allows you to either reorganize your debt or eliminate it entirely. While bankruptcy carries considerable benefits for those overwhelmed by debt, those benefits come with consequences. Bankruptcy has disastrous effects on your credit reports and credit scores that impacts your financial freedom for many years.

Initial Credit Report Impact

The degree to which a bankruptcy will affect your credit scores depends entirely on how high your credit scores are when the bankruptcy initially appears on your report. The higher your credit scores are, the greater the impact a bankruptcy will have. This is true not just of bankruptcy but of all negative credit report entries.

On average, you can expect a bankruptcy to have an impact of anywhere from 100 to 300 points, depending on your initial credit scores. By the time most people file for bankruptcy, they’ve already defaulted on numerous debts. This causes credit scores to drop and, as a result, decreases the bankruptcy’s negative effect once it appears on their credit reports. The cumulative effect, however, remains the same.

Bankruptcy Types And The Credit Reporting Period

There are two different types of personal bankruptcy: Chapter 10 and Chapter 7. Chapter 10 is the more common of the two and doesn’t directly eliminate debt. Rather, it requires the debtor to submit to a stringent repayment period lasting three to five years. Because this form of bankruptcy requires, at least, partial repayment of debt, it remains on the debtor’s credit report for only seven years.

Chapter 7 bankruptcy, by contrast, allows debtors to eliminate most or all of their debts without repayment. This type of bankruptcy indicates an individual is a higher financial risk for future creditors and is one of the few negative entries that can remain on an individual’s credit report for 10 years.

Fortunately for those who’ve had to file either form of bankruptcy, damaging credit entries have less of a negative impact as time passes. Because of this, it is possible for individuals to at least partially rebuild their credit ratings even if their credit reports contain a past bankruptcy. Potential creditors, however, can still see the bankruptcy and will take it into consideration when making credit and loan decisions.

Rebuilding Credit After A Bankruptcy

Many individuals make the mistake of ignoring their credit reports because those reports contain a bankruptcy. Once the credit reporting period passes, the credit bureaus remove the bankruptcy. Your credit scores then rest on the strength of the other information that appears on your credit report. Because any other negative information connected to the bankruptcy will be deleted either along with or before the bankruptcy’s deletion, it is imperative that you begin to repair your credit rating before the bankruptcy’s deletion. The best way to build good credit is to pay your current creditors on time. During bankruptcy, however, most or all of your creditors are eliminated. In some cases, you can retain your mortgage or even your auto loan. If this occurs, paying these debts on time is crucial since obtaining new accounts can be challenging immediately following a bankruptcy.

If you lack any accounts in good standing, consider waiting a few years and then applying for a secured credit card. Although secured credit cards carry much greater restrictions than the unsecured variety, they can be instrumental in helping those with damaged credit increase their scores.

While there are ways to mitigate the damage bankruptcy causes to your credit rating, there is no way to eliminate the damage in its entirety until the credit reporting period runs its course. Even then, you’ll likely find yourself rebuilding your credit from scratch. The best way to protect your credit from the damage bankruptcy will inevitably cause is to manage your finances in such a way that you never find yourself facing bankruptcy in the first place.