Bankruptcy Basics Week 5: How will bankruptcy affect my credit score?

I am often asked by potential clients what the impact will be on their credit score if they file for bankruptcy. Here’s the good news and bad news about bankruptcy and credit scores.

The good news is that, in my experience, the immediate impact to a credit score is relative to where the credit score was when the bankruptcy was filed. It’s kind of like falling off of a ladder. If you’re on the top rung of a ladder and you fall to the ground, it’s going to hurt. However, if you’re only one or two rungs up the ladder and you fall down, it probably won’t hurt you very much. The same applies to credit scores. If you have an 820 credit score and you file for bankruptcy, your score is going to fall significantly. However, most people that have 820 credit scores aren’t filing for bankruptcy. Most people that are considering bankruptcy have already missed payments on their credit cards or mortgage loans. They also may be getting phone calls from collection agencies or even lawsuits from angry creditors. Missed payments, collection agency activity and collection lawsuits are all reported on credit reports, which will also push a credit score down. Therefore, the filing of a bankruptcy will not significantly impact most credit scores in the short run because the credit scores are already in pretty rough shape.

The bad news is that bankruptcy can be reported on a credit report for up to 10 years. This does not mean that a person that files for bankruptcy will not get any credit offers for ten years. They just won’t get the absolute best credit offers until the bankruptcy has fallen off of their record. Most of my clients receive credit offers immediately after emerging from bankruptcy. However, the first offers that they get are usually the worst offers (think high interest rates, annual fees, significant down payments for car loans, etc.). As time passes, the credit offers get progressively better.

In some cases, the filing of a bankruptcy can actually help a credit score to improve because of the impact to someone’s debt to income ratio after the bankruptcy is filed. The debt that is discharged in bankruptcy will still be reported on the credit report but it will no longer be reported as a debt that is legally owed. This means that the debt can’t be counted against a bankruptcy filer when calculating the amount of income that they have available to pay a new potential debt.

If you are facing challenges in paying your bills, please call us for a free first appointment to discuss how bankruptcy can eliminate certain debts and put you on the path to a financial fresh start.

Categories: Blog