Understanding How Bankruptcy Can Impact Credit Score

If you’re swimming in debt, you might be considering bankruptcy. There are many times when this is a smart financial decision, but you need to know how it will impact your credit score before you make a decision. If the benefits of eliminating debt and getting on strong financial footing outweighs the drop in credit score, bankruptcy may be right for you. We’re here to make sure you understand all the pros and cons before making your decision.

What Is Bankruptcy?

Bankruptcy is a legal option that’s used to get rid of or reorganize your debt based on your current financial status. It’s helpful if you have more debt than you can handle, but you should know that a bankruptcy stays on your credit for up to 10 years after you file. While the bankruptcy itself will remain on your credit report for 10 years, its impact on your credit score is reduced over time. Many people enjoy a very high credit rating even just a few years after emerging from bankruptcy.

What Does Bankruptcy Do to Your Credit Report?

Certain public records can be listed on your credit report, and bankruptcy is one of them. It may negatively affect your credit for as long as it’s listed. Chapter 7 bankruptcies automatically stay on your report for 10 years from the filing date. A discharged Chapter 13 bankruptcy is normally on your report for seven years from the filing date unless you don’t meet certain requirements, in which case it remains on your report for 10 years. Both Chapter 7 and Chapter 13 bankruptcy impact your credit scores the same way.

How Do Discharged Accounts Appear on Your Credit Reports?

You probably filed for bankruptcy because you were struggling to keep up with your bills such as medical debt and lines of credit. When included in a bankruptcy filing, these accounts will still show up on your credit reports, but will be listed as “included in bankruptcy” or “discharged.” This may still cause lenders to deny approval for your applications. However, they will no longer be listed as past due or unpaid, bringing you a sense of relief that comes with the freedom from financial burden.

Luckily, your credit scores can gradually improve as time goes on. To do this, though, you’ll need to use your credit responsibly going forward.

How Do You Rebuild Your Credit After Bankruptcy?

You can work on building your credit up post-bankruptcy, but it won’t be easy or immediate. It takes time and effort. You can start by listing the debts you included in your bankruptcy and keep an eye on your credit reports. They should be updated to a discharged status about two months after you file. Watch to be sure the negative marks are removed when they should be and check your report for errors every couple of months.

You can speed up the healing process for your credit score by getting a secured credit card. Keep credit lines to amounts you can reasonably afford to pay back and make all your payments on time and in full. If you remain responsible with your finances, you’ll see a rise in your score over time.

While bankruptcy can relieve you of overwhelming debt, the credit and financial implications are serious and should be considered carefully. Even though your accounts will be paid in full, they’ll still reflect negatively on your credit score. You can lessen the impact on your credit by making sure your reports reflect your current situation and by using your credit responsibly in the future.

If you’re in over your head with debt and are looking for a way out, Cutler and Associates can help. Contact us today to discuss your financial options.