Bankruptcy and Credit Score

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How Will Bankruptcy Affect My Credit Score?

HIGHLIGHTS
  • Review the effects of bankruptcy on your credit.
  • Understand the steps to take, post-bankruptcy, to rebuild your credit.
  • Consider a secured credit card, if you do not qualify for a standard credit card.
Mar 07, 2012

Editor’s note: After we published this article, Fair Isaac & Co. released a summary of how different negative events degrade a credit score. See Short Sale, Foreclosure & Your Credit Score and Foreclosure, Delinquency, Debt Settlement & Credit Scores for a better look into how bankruptcy impacts your credit score, and how much time it takes to recover from common events.

Bankruptcy is one of the most damaging things that can appear on your credit report. Exactly how much a bankruptcy will cause your credit score to drop, however, is impossible to know, since the three main credit bureaus — Equifax, Experian, and TransUnion — do not publicly release the precise formulas they use to calculate credit scores. Furthermore, other variables, such as your pre-bankruptcy score, your credit history, and what accounts may have stayed in good standing while you were in bankruptcy, will also be factors.

Whatever the drop turns out to be, the filing for bankruptcy virtually ensures a very low credit score — at least for the while — and it will be listed on your credit report for 7-10 years.

There are several steps you can take to help improve your credit rating post-bankruptcy. Building and maintaining a good credit score requires diligent effort and along-term commitment to financially sound living.

Review Your Credit Report

After your bankruptcy is discharged, generally speaking, any account included in your bankruptcy filing will appear on your credit reports as "included in bankruptcy," and reflect a $0 balance. It should not appear as open and past due, which is what likely showed prior to the filing of the bankruptcy. In order to make sure that no account that was included in your bankruptcy shows as unpaid or open, you should first pull a copy of your credit report from each of the three major credit bureaus (Equifax, TransUnion, and Experian), then carefully review the reports to identify which discharged accounts are being reported inaccurately. A free credit report can be pulled for each of the three bureaus once a year at AnnualCreditReport.com.

Rebuilding Your Credit Post-Bankruptcy

To rebuild your credit score after a bankruptcy filing, you need to establish new credit accounts and making timely payments on them. This way,you will begin to show a positive payment history. Your payment history accounts for approximately 35% of your credit score, so creating a new payment record is essential to rebuilding your credit score after bankruptcy. Since many credit card companies will not extend credit to people who have recently filed bankruptcy, a good option to consider is a secured credit card.

Secured Credit Card

Secured credit cards require you to deposit cash in an account with the credit card bank and the credit line available on the card is equal to the amount of cash you have on deposit. This may sound strange; why would you not just spend your own cash? However, your secured credit card will report timely payments to the credit bureaus each month and will help you re-establish your payment history. Also, small credit accounts, such as gas cards, can be a good option to build credit, but you should make sure that you pay off your balance each month to avoid high finance charges and to prevent yourself from starting down the spiral of debt again. The first credit cards you qualify for, after your bankruptcy, are likely to come with a high interest rate. That will not be a problem as long as you do not run up debt on the accounts.

Co-signers

Having someone co-sign on a loan or credit application can be an effective way to boost your score. The risk, however, falls on the person that co-signs for you. If you default on a payment, the co-signer is fully responsible for the debt and any fees and interest tacked on. For this reason, it is very hard to find someone willing to co-sign, in general, and even more difficult when you have filed for bankruptcy.

It Takes Time to Build Your Score

The more time that passes, the less negative impact your bankruptcy filing will have on your credit score. However, to build a positive credit rating you will need to counterbalance the negative impact of the bankruptcy with positive listings on your credit reports as mentioned above. You should make sure that you have at least three active trade lines open and in good standing. If possible, a variety of accounts is best for boosting your score. For instance, having a mortgage, a bank credit card, and a store card is better than having three bank credit cards. As time passes, the positive impact of your new accounts will become stronger while the negative impact of your bankruptcy should become weaker. If you take the right steps, you could have strong credit within two to three years post-bankruptcy, even though the bankruptcy will still remain on your credit report for 10 years.

Comments (10)


Avatar
Rob S.
New Orleans, LA  |  March 07, 2012
What a GREAT site thank you so much for the info. My wife and I have just past through the gates of hell the past 2 years. After both of us with 6 figure earnings, with perfect credit scores, we both were laid off in 2009 after our companies downsized and closed offices. We both could not find work for over a years and lived off our savings and thinking it could not be MUCH longer, then going though our 401k. When we were down to our last 25,000 of 401k we said we needed to pull the plug on our unsecured to try to save our home. While that worked, it released a firestorm of creditors coming after us. AM EX and another creditor refused to work with us and ended up suing us. We were able to settle those with the help of an attorney but it just about bankrupted us. Our attorney kept urging us to go bankrupt but I just couldnt do it after researching all the facts. We are both back working now, though far less incomes than before, and now we are trying to rebuild our credit. We are back to near 6 figure incomes, but being unable to sell our home which is underwater and having a significant student loan, we are JUST barely keeping our heads above water. Question (1): was it wise NOT to go bankrupt and instead default on the unsecured and work our way through it, though painful as it was? Most of our unsecured we settled for 35%, except Am Ex who were the WORSE to deal with but we settled for 60%. Question (2) it has been about 1 year since we first defaulted, and we have only one settlement plan that is still in the works but will be completed in 3 more months, and we have 2 smaller ones $1200 & $1800 that I have not settled yet but expect to in the next 6 months......What is the best and fastest way to begin to rebuild our credit??????? The good news is that in a few months we will be debt free except for our mortgage and another 11 months our student loan will be paid off, and from that point we will have a significant net monthly cash flow. One other thing, we are 3 payments behind on our morgage but we are months into the process of a loan mod which not only should reduce our mortgage but will take the 3 month delinquency and re amortize it into the mortgage. Our mortgage holder claims we should qualify and it is in the final stages.....but we'be been at the endless paperwork for 5 months now!!! Thanks for your help!
Avatar
Bills.com
March 07, 2012
We cannot change the past, and even if not filing bankruptcy was the worst mistake of your life, what can you do about it now? There are no perfect solutions to resolving debt — all have positives and negatives. When it comes to mortgage modifications, mortgage servicers are so completely unpredictable and skittish that yours may have used the bankruptcy as an excuse to deny even talking to you about it. On the other hand, the bankruptcy may have given you more leverage in the negotiations because you could have used a reaffirmation as a carrot. Who knows?

Regarding your credit score, see the Bills.com resource FICO Score Calculation to learn what goes into a credit score, and four tips for improving a credit score.

Regarding the last two unpaid accounts you mentioned, consider a Pay For Delete, which will remove these derogatories from your credit history and have a positive impact on your credit score.
Avatar
Fred G.
Plano, TX  |  May 31, 2011
Ok i have 3 credit card with chase bank and also my mortgage is with chase , because of my financial situation i am not able to pay for my chase credit cards , now if i stop paying my cards payments do the bank have the right to put hands or lien on my house , thats the only property i have and it is filed as homestead .
Avatar
Bills.com
May 31, 2011
I have not heard of a right of offset that a credit card issuer has to seize or place a lien on real property it, coincidentally, is also the mortgage servicer for. Keep in mind that a mortgage servicer has a fiduciary responsibility to the mortgage's investor.

The credit card issuer has the same rights as any other creditor that are allowed under your state's laws.
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Judy L.
Elyria Township, OH  |  May 23, 2011
I have multiple credit cards and one loan that are in default 180 days. I can not afford a private attorney. In speaking with Legal Aid, I was told that they can help me as soon as one of the creditors file a lawsuit. This action then qualifies me for assistance. I have just recently received a phone call from two of my creditors stating that they are going to charge off the debt which means I will have to pay taxes on the debt. I'm confused with the information I am finding online about charge offs. Why are they not suing me or sending my account to collections? What happens to these charge offs when I file bankruptcy? Thanks.
Avatar
Bills.com
May 23, 2011
You do not want to be the defendant in a lawsuit. I have four reading assignments for you that may help reduce your confusion:
  1. Read the Bills.com resource Charge off to understand exactly what charge-off does and does not mean to you legally.
  2. Read Served summons and complaint to understand more about the lawsuit process.
  3. Read Chapter 7 bankruptcy to learn more about this option and if you qualify.
  4. Finally, read 1099-A vs. 1099-C to learn more about income related to forgiven debt.

Ask any follow-up questions you may have on the appropriate page.

Avatar
Carl P.
Spokane, WA  |  February 11, 2011
I discharged a lot of debt through bankruptcy back in 2005. Just recently, a few of the old debts that were with collection agencies have reappeared on my credit report and I am getting calls again. I don't think I owe this money, but I can't find my bankruptcy discharge papers. Please give me your best advice about what I should do?
Avatar
Bills.com
February 11, 2011
Consult with your bankruptcy attorney to see if he or she has a copy of the 2005 discharge order. If not, you may be able to get a copy of the discharge order from the bankruptcy court that issued the order. In the later case, be prepared to pay for a copying charge.

If the creditors are attempting to collect on a discharged debt, they are in violation of federal law. Consult with your bankruptcy attorney about the possibility of filing a lawsuit against the creditors.
Avatar
Dennis R.
Billings, MT  |  January 31, 2011
i co signed for my son and his wife on a car loan and now they have filed for bankruptcy and as a co signer my cred has been effected and i need to know how fix this and get this off my credit report
Avatar
Bills.com
January 31, 2011
The danger that exists is not limited to the damage to your credit score. As a co-signer, you have liability for paying the debt. You can expect to receive collection calls from the creditor. You will need to work out payment arrangements or something with the creditor. If not, you will be at risk of having your wages garnished and your bank accounts levied.

There is no quick fix for your credit score. To improve your credit you will need to concentrate on the positive actions that boost a credit score:
  • Continue to pay your accounts on time.
  • Diversify your credit portfolio. If you have no credit cards, get a secured credit card pay it on time.
  • Keep your oldest account open.
  • Avoid shopping for car loan or mortgage until your score recovers.
  • If you have any current account balances, pay them off to lower your credit utilization ratio.

You mentioned bankruptcy. If your child includes the loan in the bankruptcy filing and if the debt is discharged, then neither you or your child have liability for the debt.

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