In most instances bankruptcy can lower your credit score. However, even though bankruptcy lowers credit scores, it probably won’t lower your score much more than it already is if you are already behind on your payments and are in a situation where bankruptcy is your best alternative. In those instances where you are already in default, the effect of a bankruptcy on your credit score is not significant. What is important is that bankruptcy can help by lowering or eliminating your debts, which, in turn, will improve your credit score.
Raise Your Credit Score in as Little as 1 Year After Bankruptcy
Credit scores are primarily based on your financial history during the previous 2 years, with more recent data having more weight on your score. As a result, if you use credit wisely after bankruptcy, you can quickly raise your score in as little as 1 year after bankruptcy!
Impact of Chapter 7 and Chapter 13 Bankruptcies on Credit Score
Some people think that filing a Chapter 13 reorganization bankruptcy is better for your credit. However, this is not necessarily the case.
First, in most cases, you will not get new credit until you receive a discharge of your prior debts. Without that discharge, you are a significant risk to any new lenders since they will not know your debt load until you have actually received a discharge of your debts. Chapter 13 bankruptcy requires you to pay your past creditors with future income. In Chapter 13, you must pay to your creditors all of your disposable monthly income for 3 to 5 years and you will not receive a discharge until your payment plan is completed. It is possible to receive a discharge sooner by either paying your creditors 100% of their debt or by obtaining a hardship discharge, but that will only be granted under special circumstances. As such, in most instances, obtaining the discharge takes 3 to 5 years.
In Chapter 7, the process typically takes 4 to 6 months, after which you receive a discharge. Since you receive a discharge much quicker than in Chapter 13, you can re-establish credit sooner, and if you get new credit and pay your bills on time, your credit score will increase.
Getting New Credit After Bankruptcy
A bankruptcy discharge makes you a better credit risk because your dischargeable prior debts are discharged and because you are restricted from filing for bankruptcy for a reasonable period of time. As such, your credit worthiness will be largely determined by your income and by the amount of debts you have that were not discharged. If you have income in excess of your monthly expenses, you should easily be able to re-establish credit.
You can apply for secured credit cards, where you have to deposit a minimum amount in a savings account. This is a good way to reestablish your credit rating with a good trade line. Capital One, for instance, is a major lender to people with lower credit scores. One of the best ways to find out about your options is to go to online forums that cover consumer credit. This way you can find out about different lenders without applying for credit and risk lowering your score if rejected.
How Long does Bankruptcy Stay on Your Credit Report?
A Chapter 7 bankruptcy can be listed on your credit reports for up to 10 years from the bankruptcy filing date, and a Chapter 13 bankruptcy can be listed for up to 7 years after filing.
Checking Your Credit Reports
Since credit scores are calculated based on information in your credit reports, it is important that you ensure that your reports have accurate information. After receiving a discharge of your debts, you should check all 3 credit reports to make sure that your discharged debts are listed as discharged on your credit reports.
You can get your credit reports free of charge at AnnualCreditReport.com, which is a centralized service for consumers to request free credit reports. This website was created by the 3 nationwide consumer credit reporting companies, Equifax, Experian and TransUnion. Under the Fair and Accurate Credit Transactions Act (FACT Act or FACTA) you can request and obtain a free credit report once every 12 months from each company. You can also dispute credit information at this secure site.