Your Credit Score Is Not Ruined Forever After a Bankruptcy Filing (2024)

Bankruptcy is a useful debt relief tool. It can give you a fresh start when unpaid debt becomes unmanageable. Sadly, many people attach a stigma to filing bankruptcy and fail to see its advantages and benefits. Instead, they focus on the notion that bankruptcy will forever ruin their credit. But this is just one of the many myths of bankruptcy. It often causes people to put off filing, which only delays bankruptcy’s benefits. While your credit score is affected by bankruptcy in the short term, we’ll discuss how your credit score is not permanently ruined by filing bankruptcy, whether you file a Chapter 7 or Chapter 13 case.

The Benefits of Bankruptcy Often Outweigh the Hit to Your Credit

Finding a solution to burdensome debt is not an easy task. Failing to pay your debts can cause overwhelming stress that limits your ability to enjoy life. It affects your physical and mental health. Wondering what happens next can keep you up at night and affect your ability to sleep, which can lead to other serious health problems. Bad debt can cause feelings of uncertainty, shame, and low self-esteem. Relentless and unscrupulous debt collectors can add to this stress. They push the law to its limits and apply constant and continuous pressure on consumers.

Millions of Americans have used bankruptcy as a very effective debt relief tool. Last year, 544,463 people filed bankruptcy cases. It can provide a fresh start by reorganizing your debts under Chapter 13 or by liquidating your assets to discharge your debts under Chapter 7. In most Chapter 7 cases, debtors find debt relief and get a fresh start without liquidating any of their assets.

Once you file a bankruptcy case, an automatic stay goes into effect immediately. The stay stops most actions to collect debts. Creditors are prohibited from initiating or continuing collection activities during your bankruptcy case. The automatic stay stops foreclosures, repossessions, wage garnishments, and bank levies. It also prohibits creditors from contacting you during your bankruptcy case.

When your bankruptcy case is complete, the court issues a discharge of your debts. This means your debts are permanently canceled through bankruptcy. If you receive a discharge, you’re no longer legally responsible to repay the debt. Creditors or other debt collectors cannot make any attempts to collect the debt in the future after the bankruptcy case has ended. Having your debt eliminated or discharged through bankruptcy gives you a fresh start to rebuild your finances. Eliminating most debt obligations that require a monthly payment eliminates a lot of stress and uncertainty. It gives you a chance to start over on the road to better credit.

Bankruptcy Can Drop Your Credit Score by Up to 200 points...

Filing any type of bankruptcy case affects your credit score. But despite what many consumers believe, it doesn’t affect your credit score permanently. You can get a handle on the effects of bankruptcy on your credit score by knowing the FICO and VantageScores’ credit score ranking systems.

FICO scores range from 300 to 850 as follows:

• A poor credit score is between 300 and 579.

• A fair credit score is between 580 and 669.

• A good credit score is between 670 and 739.

• A very good credit score is between 740 and 799.

• An excellent credit score is 800 or up.

VantageScores range from 300 and up as follows:

• A very poor credit score is between 300 and 499.

• A poor credit score is between 500 and 600.

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• A fair credit score is between 601 and 660.

• A good credit score is between 661 and 780.

• An excellent credit score is 781 or up.

Once you file bankruptcy, you can expect your credit score to drop by up to 200 points. Many peoples’ scores will fall into the “poor” range because of the bankruptcy filing. A person with a score of 680 typically loses between 130 and 150 points. Someone with a score of 780 typically loses between 200 and 240 points. Lenders might consider both individuals to be credit risks after these drops in their scores.

A lower credit score will affect your ability to obtain any type of new credit in the period immediately after the bankruptcy filing. The length of time that a bankruptcy filing remains on your credit report depends on the type of bankruptcy case that you filed. Chapter 7 bankruptcies remain on credit reports for 10 years from the date of filing. Chapter 13 bankruptcies remain on credit reports for seven years from the date of filing.

A credit score below 560 may make it difficult to get a mortgage or auto loan. But there is good news if you have a lower credit score and you want to buy a home. FHA-backed loans are available for consumers with credit scores between 560 and 600. If you’re able to get a personal loan or open a new credit card account, a poor or fair credit score may result in you having to repay it at a higher interest rate.

...But Many People See Credit Score Improvements Within 2 Years After Filing Bankruptcy

Inevitably, bankruptcy has some effect on your credit. But this is only in the short term. If you manage your credit wisely and stay current paying the new debts you incur, you can quickly improve your credit score. This will allow you to get new credit when you need it most.

Even if your credit score drops 200 points because of filing bankruptcy, you’re in an advantageous position. Having your debt reduced to almost nothing gives you an opportunity to make healthier financial decisions and to manage new debts more easily. This also makes it much easier to rebuild your credit. A good first step toward rebuilding your credit is to create and follow a monthly budget. Pay any of your remaining bills like a car loan, student loan, or utilities on time and in full every month. Budgeting will help you make timely payments, which is a major part of rebuilding your credit.

Shortly after filing, it may be difficult to get approved for an unsecured credit card. Or you may only qualify for cards with high interest rates and/or expensive annual fees. But most credit card issuers offer secured credit cards. You’ll start with a low credit limit based on the security deposit you make into your account. Becoming an authorized user of a family member’s line of credit can also help reestablish your credit. You can also consider adding a family member as a cosigner to one of your accounts to help rebuild your credit.

It’s also important to regularly monitor your credit report for errors and dispute them. The three credit bureaus—Experian, TransUnion, and Equifax—provide a free credit report every 12 months.

Within a year, you may begin to see your credit score improve. It may take some people two years to see improvement. The takeaway from this is that filing bankruptcy only affects your credit score in the short term. After a few more years, many people see their credit scores return to what their scores were before they filed for bankruptcy or even higher.

The Fact That You Filed Bankruptcy Stays on Your Credit for 7-10 Years

Bankruptcy is an effective debt relief tool. You can start to rebuild your credit fairly quickly after receiving a bankruptcy discharge. But the bankruptcy will remain on your credit report for 7-10 years. This makes rebuilding your credit even more important to counteract any negative effects that a lender might attach to your bankruptcy filing. Chapter 7 cases will stay on your credit report for 10 years while Chapter 13 cases will stay on your credit report for 7 years. You can’t remove these events from your credit history. But managing your money wisely after filing for bankruptcy can help you reduce the negative impact.

Once the 7 or 10 years pass and the bankruptcy filing is removed from your credit report, your credit score will increase by 50 to 150 points. The ultimate increase in your credit score will also depend on the presence of other negative information in your credit report.

Rebuilding credit should be your highest priority after bankruptcy. Developing good money management habits post-bankruptcy will help you wisely use new forms of credit. Managing your new debts effectively will lessen the effects over time of a bankruptcy filing. As you continue to use credit, it will become part of your credit report and credit history. These effective uses of credit will eventually shape a positive credit profile and neutralize the negative effects of the bankruptcy filing on your credit score.

Building a good payment history by making timely debt payments and maintaining low account balances will help repair your bad credit. Also, getting a secured credit card or a credit builder loan, having a family member act as a cosigner on an account, or being added to a family member’s line of credit are other ways that you can build credit and restore your credit score to a pre-bankruptcy level.

It’s also important to keep your credit utilization low post-bankruptcy. Lenders prefer a credit utilization ratio of 30% or less. You can determine your own credit utilization ratio by adding up your total use of credit (aka the amount of debt you’re paying) and dividing it by your total available credit.

Your bankruptcy attorney should explain these credit repair options to you at the close of your case as ways to help you develop good money management habits. Lenders like credit card companies will notice your improved credit profile and it will be easier for you to obtain credit.

Let’s Summarize...

Although a bankruptcy case can remain on your credit report for 7-10 years, depending on the type that you filed, it’s not the end of your financial life. In fact, it’s just the opposite. Bankruptcy provides an opportunity for a fresh start. You can improve your credit score in one to two years. There are many ways to counteract bankruptcy’s effect on your credit report and your credit history. In the years following your bankruptcy discharge, make timely payments, take out new credit via a secured card or as an authorized user, and keep your credit utilization rate low to build a strong credit profile.

The benefits of filing bankruptcy, including the newfound peace of mind and eliminating significant stress about the repayment of your debts, can often more than make up for any negative hits to your credit score.