Bankruptcy and Your Credit Score

There is no way around it—filing for bankruptcy will almost certainly leave you with a big, black mark on your credit report. However, your overall credit profile determines the kind of impact that bankruptcy will have on the credit report. Despite the fact that it can stay on your record for as long as ten years, filing for bankruptcy could still be the best option available to you, but it is important to understand how the filing will impact your creditworthiness.

What Is a Credit Score?

A credit report is a tool relied on by lenders when they would like to establish whether a potential borrower qualifies for a particular credit, mortgage, or other loan.

Lenders use the information on the credit report, together with any additional information provided to come up with a score that represents your borrowing history. It helps indicate the level of risk the lender would be taking by granting you a loan, and whether they can expect you to make your repayments. The lower your score, the less likely you will be able to obtain credit. There are three credit reporting bureaus that maintain credit scores for US borrows based on their financial history.

What Impact Does Bankruptcy Have on Your Credit Score?

There are two kinds of bankruptcies for individuals; Chapter 7 and Chapter 13 bankruptcy. The degree to which the bankruptcy will affect your credit score will depend on the type of bankruptcy you file for as well as your current circumstances. Someone with a better credit score and no judgments against them can expect a huge decrease in their score. Typically, it will be a minimum reduction of 100 points and could be significantly more.  

This kind of reduction has the potential to make your credit go from excellent to poor. Filing for bankruptcy thus makes it much harder for you to qualify for future loans as lenders use your rating when determining how much money they can advance to you as a loan or mortgage. It is important to note that it can stay on your record for as long as ten years. On the flip side, however, some lenders like auto dealers purposefully seek out those who have filed for bankruptcy since they know the person will be unable to file for bankruptcy again for at least 8 years. Thus, a bankruptcy will not disqualify you from all loans, despite its impact on your credit score, and within 2-5 years you will likely be able to qualify once more for most types of loans.

Apart from the effect on your creditworthiness, you need to understand that a poor credit report could actually make it difficult to land a job. Under the law, employers are allowed to run credit checks on all their potential employees before hiring you, though they do have to obtain your permission.

Additionally, you should also keep in mind that the relationship between a bankruptcy and your credit score is not a black and white guarantee that the score will go down. In some instances, when the person filing for bankruptcy is in dire financial circumstances with numerous judgments against them and actions such as wage garnishing being taken against them, a bankruptcy could actually result in an increase to the credit score.

Either way, your credit score will likely be in ruin following a bankruptcy, but this process also makes it possible for you to re-establish your credit with time, while ensuring that collection agencies will stop harassing you over un-cleared debts.

It is, therefore, important for you to sit down with a bankruptcy advisor such as Bill Duncan of the law office of Carolyn Moller Duncan, P.C. to discuss your current situation, all your potential options, and how they will impact your life, including your credit score. Please do not hesitate to give us a call today.


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