Does Bankruptcy Affect Credit Score?

Bankruptcy and Your Credit Score: Facts You Should Be Aware Of

Debt can be a tricky thing to manage, and it is not uncommon for people to find themselves wondering whether they should file for bankruptcy or not. Based on the research carried out, one of the most common questions that most individuals filing for bankruptcy ask is the effect that it will have on the credit score. Bankruptcy filing has some consequences on your credit rating, more so, within the next couple of years after the discharge of bankruptcy. However, the degree and extent of credit damage will depend on the circumstances surrounding your case.

How Bankruptcy Affects Your Credit Ratings?

This is because when you file for Chapter 7 or Chapter 13 bankruptcy then it becomes a public record that can be reported on your credit report. This immediately gives a message to any potential lenders that you have been a poor financier. Consequently, the process of filing for bankruptcy leads to decreases in credit scores and can reach 100+ points. A study found that the point decrease is proportional to the pre-bankruptcy credit score or the closer to 850 the credit score is before filing for bankruptcy, the higher the point decrease.

In addition to the bankruptcy status itself, associated changes often accompany a bankruptcy.

Reduced Average age of credit accounts - Bankruptcy eliminates credit card balances which results in a higher usage ratio of the remaining credit. Conversely, high numbers of credits and loan amounts lead to higher scores.
Inactive accounts – This is the type of account where the lenders may close after the filing of the bankruptcy by the borrowers. It can reduce your credit history length and the total amount of credit available to you which is not good at all.
Records of payment histories – Such factors as the ability to pay on time before the actual bankruptcy, if not cleared, will reflect on the credit report for up to 7 years. New late payments also seem to happen again after the bankruptcy, if borrowers incur more liabilities than they are capable of meeting.
Higher interest rates – when accounts are not closed, credit card companies increase interest rates on balances, which impacts credit scores.

The accumulative effect is that, after filing for bankruptcy, it becomes challenging to obtain credit for several years. You are likely to be charged a higher interest rate, receive lower approval chances, and limited access to small loan amounts until your credit is repaired again.

That is how long bankruptcy stays on your credit score

The credit effects of bankruptcy typically have a negative influence that fades with time but remains constant. Here's a look at how long bankruptcy affects credit score components.

Chapter 13 bankruptcy – this remains in your credit report for 7 years. Chapter 7 bankruptcies remain 10 years from the filing date.
Past due payments – Even if the consumer has not filed for bankruptcy in the last 7 years, any past due payments will reflect on the reports.
Length of credit history – The accounts that are closed still age for 10 years after the account has been closed.
Credit mix – Bankruptcy does not have a significant effect on your credit mix.

It is also important to note that the bankruptcy filing per se remains on reports for 7-10 years, however, its impact on scores is not long-lasting. The credit scores can begin their steady recovery and positive shift within the timeframe of one to two years after bankruptcy discharge. This is because, after 2 years, scores somewhat recover depending on the amount of positive credit created. However, the negative effects of bankruptcy remain on the credit reports for as long as 7-10 years even though it can take this long for it to be purged off.

How To Rebuild Your Credit After Bankruptcy?

It is important to note that it is not an easy task to repair credit after bankruptcy; however, when you take your time and follow the right strategies, you will be in a position to make significant progress faster. Here are some tips:

How to Apply for a Secured Credit Card?

Since approval is much simpler, having one or more secured cards instantly begins favorable payment reporting. Ensure that any secured credit card is reported to the major credit bureaus. The reliability of monthly payments molds proper financial behavior.

Maintain the Balances on Credit Cards to the Lowest Possible Levels

Working with values that are above the limit underlines a higher risk, and thus, has an impact on the decrease of the scores. The idea is to maintain each balance below 10 % of its limit; this is a critical concept in usage necessary for raising scores.

Avoid Additional Hard Inquiries

Each of them initiates a query that leads to decreased scores for a short while. Do not apply for any unwanted credit until your score has gotten back on its feet. This is also a sign of risk since firms receive too many inquiries.

Establish the Credit Mix over time.

Having both revolving (credit cards) and installment (fixed loans) trades is beneficial for a credit mix after 12+ months of good credit history. Do not create accounts that are not required to serve the purpose of diversifying your mix.

Let Time Pass

Since negative marks are often removed over time, there is no specific action that needs to be taken beyond good behavior. In 7-10 years, even the worst credit scores that are affected by bankruptcy can be restored if one exercises good financial behaviors. Tracking your progress is done by monitoring your annual free credit reports.

If one is facing a Bankruptcy Decision, one should not just take it lightly.

Bankruptcy can remain on credit reports for several years but credit can be repaired over time with patience and practice in proper management of money. Consider all the aspects and factors before concluding as to whether bankruptcy is the right solution for you or not. It should be understood that it provides immediate financial assistance at the cost of long-term detrimental effects on credit history that can take significant effort to overcome.

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