Filing for bankruptcy allows consumers to clear away a big part of their existing debt. However, lots of people tread lightly on the topic because they fear the consequences. The biggest of which is damage to their credit score.
Though the impact bankruptcy can have on a consumer’s credit score is very significant, it doesn’t stay there forever. So that raises the question – how soon can we rebuild our credit after bankruptcy? Well, we’ve got the answers! We created this guide to help you understand how bankruptcy affects credit scores, for how long, and what you can do to rebuild it. Scroll down to learn more.
How Will Bankruptcy Affect My Credit Score?
No one knows exactly how much bankruptcy can impact your credit score. This is due to the large number of factors that must be considered, like how credit scoring systems and the creditors’ criteria change over time. Additionally, credit scoring agencies keep their formulas private. Your credit depends on the people you’re compared to, as well as on your previous and future credit use.
However, it’s a general rule of thumb that a credit score is negatively impacted almost immediately once a person files for bankruptcy. In fact, bankruptcy is thought to be the worst possible impact on a person’s credit standing. This is especially the case when we compare bankruptcy to other events, like foreclosure.
Depending on the type of bankruptcy you file, you can then figure out how it will impact your credit and how long it will remain there.
Chapter 7 Bankruptcy
If you file a Chapter 7 bankruptcy, the court places a stay on all your current debts. This way, creditors are prevented from collecting payments, repossessing property, or foreclosing on your home. What a Chapter 7 bankruptcy does, is it uses your non-exempt assets to repay your debts. After some time passes, the rest of the debt is eliminated. However, once you file the report, it will remain on your credit report for ten years.
Chapter 13 Bankruptcy
A chapter 13 bankruptcy, on the other hand, requires debtors to follow a 3-5-year repayment plan. This way, debtors get the opportunity to reorganize their finances and prevent any further financial damage. Unlike the Chapter 7 bankruptcy, this one remains on your credit report for seven years. With it, consumers get the opportunity to repay the creditors under more desirable terms. Hence, it might help you recover faster financially.
Additionally, lenders think of a Chapter 13 bankruptcy as more favorable compared to the Chapter 7 bankruptcy. This is due to the debtors repaying a part of their debt, unlike with the Chapter 7 counterpart.
Low Versus High FICO Credit Scores
Once you file for bankruptcy, you’ll be dropping to a bad credit score, no matter what your credit was in the beginning. Debtors that have a good credit score are proven to be the ones that suffer the most. Put simply, the higher your pre-bankruptcy credit is, the larger the drop is after you file for bankruptcy. On the other hand, debtors with low credit aren’t impacted as much.
Consumers with excellent, very good, or good credit standing will experience an average drop of 200 points after filing for bankruptcy. Those with a fair or poor credit score will lose from 130 to 150 points.
How Can I Rebuild My Credit After Bankruptcy?
Though filing for bankruptcy and damaging your credit score might seem like the end of the world, you can always turn things around. Wondering how to improve credit score after chapter 7 and chapter 13? We broke down all the essential steps you need to take, as well as a few things to keep in mind when you’re rebuilding your credit.
Analyze Your Credit Report
If you’re trying to rebuild your credit after bankruptcy, getting a copy of your credit report should be your first step. Many online platforms offer free weekly credit reports because of the Covid-19 pandemic.
Figuring out how your credit score works and what it’s made up of is key to rebuilding it. You’ll be able to get insight into why it is or isn’t rebuilding and understand what areas need more attention and improvement. Additionally, you’ll be able to catch any errors in the credit report that could be working against you. This can include incorrect personal information, inaccurate public records, or your bankruptcy not being removed as soon as possible.
Keep Track of Your Credit Score
Keeping track of your score every month is an essential step in your journey to rebuilding credit after bankruptcy. As with credit reports, you can easily find an online service that will provide you with free score updates.
Make sure to monitor your credit for any warning signs regarding any issues and inaccuracies. This can entail faulty account statuses, civil suits you weren’t a part of, and fraudulent loan applications made in your name.
Practice Responsible and Smart Financial Habits
A great way to build up credit and look trustworthy in the eyes of lenders is proving you can still handle credit loans. You can get several credit products to raise your score, like credit-builder loans or a secured credit card.
Moreover, do your best to be very responsible with your spending. This entails building an emergency savings fund, reducing your credit card use, and making consistent and timely payments. You should also keep your credit balance low, as what you owe counts for 30% of your FICO score calculation.
Why Immediately Focus on Rebuilding Your Credit Report?
If you have a bad credit score, getting a financial advance can be a challenging endeavor. For instance, any credit score below 550 doesn’t let you qualify for a mortgage. In addition to trouble with loan approvals, there are some other difficulties you might face. For example, credit card companies give out lower credit limits on consumers with a bad score, even if they were pre-approved.
Next, any financial help you might be getting will come with high interest rates. This will increase the total cost of the financing, as well as the monthly payments. Getting approved for rentals may also be affected by your poor credit history.
These are all essential aspects of a person’s life that will be affected by a credit score damaged from bankruptcy. So, it would help if you started working on improving your financial image as soon as possible.
How Long Will It Take to Rebuild My Credit After a Bankruptcy?
Most of the time, consumers can rebuild their score within 12 to 18 months after filing for bankruptcy. Note that several factors dictate the speed of your improvement, like the type of bankruptcy you file. But, if you take all the proper steps, you should see improvement after the one-year mark.
During the 12 to 18 months, your FICO credit report will likely go from bad payment history (below 579) to fair (580-669). However, any further improvement will take a lot longer. The default will stay in your history for 7 or 10 years and affect it that long too.
Rebuilding Your Credit After Chapter 7
Though a Chapter 7 liquidation lasts ten years, you’ll have no problem getting a fresh start with your credit score. Usually, cases are processed within four months, and you can start rebuilding credit after the bankruptcy is discharged. In addition, you can get a new credit card since credit card companies realize you have more money to cover other bills.
Rebuilding Your Credit After Chapter 13
As we already mentioned, the Chapter 13 bankruptcy remains on your credit report for seven years. Yet, since it entails repaying creditors, it’s likely to remove a bankruptcy from your credit report sooner. Since it usually lasts 3-5 years, you can expect it to disappear 2-4 years after getting a bankruptcy discharge.
What if I Need a Loan After Bankruptcy?
Many services offer financial products to consumers after filing for bankruptcy. For instance, many mortgage companies offer FHA loans for credit scores ranging between 560 and 600. Moreover, secured credit cards and rebuild loans are other viable options. Alternatively, consumers with scores above 600 get access to a larger roster of financing options, like payday or bank loans.
Filing for bankruptcy will strongly impact and lower your credit score. However, that doesn’t mean that the damage is irreversible. Depending on how you declare bankruptcy, it will remain on your credit report for up to seven or ten years. Still, there are several measures you can take to improve your credit history as soon as a year after.