One of the biggest fears people have about filing bankruptcy is the impact to their credit scores. Will your credit score be trashed forever? How low will it go?
Credit has become such a staple in our lives that living without good credit can be a huge inconvenience. People are so afraid of losing their good credit – their mediocre credit even - that they struggle with debt for months or years and still end up filing bankruptcy. Unfortunately, there’s not much good news about your credit score when it comes to bankruptcy.
Bankruptcy Impact to Credit Score
It’s difficult – or better yet, impossible – to predict exactly how far your credit score will fall after you file bankruptcy. The impact to your credit score is largely based on where your credit stands now and what information is on your credit report.
In 2010, FICO released information about how bankruptcy and other credit mistakes affect your credit score. Using a mock scenario with two different credit profiles, FICO showed a bankruptcy could cost up to 240 points for someone with a 780 credit score and 150 points for someone with a 680 credit score. While the person with the higher credit score loses the most points, in both examples the individual credit scores end up around the same place, 540 and 530. If credit problems have already pulled your score into the 500-range, you have a little less of a credit score to protect.
But, that’s just an example of what could happen to your credit score. Yours might not drop as much or it might drop more. You won’t know unless you actually file.
Are All Bankruptcies the Same?
FICO’s example doesn’t differentiate between Chapter 7 and Chapter 13 bankruptcy, the two types of bankruptcy available for personal debts. Chapter 7 bankruptcy will be over quickest, with discharge happening a few months after you file (if you qualify). It takes years to complete a Chapter 13 bankruptcy since you’d be on a three- to five-year repayment plan.
Alternatives to Bankruptcy
While you might lean away from bankruptcy based on the potential impact to your credit score, keep in mind that it may be the best of all your available options. Debt repayment and relief options include:
- Paying on your own
- Entering a debt management plan through a credit counseling agency
- Filing bankruptcy
Out of these, filing bankruptcy will likely hurt your credit score the most, but it may be the best option if you have limited resources for paying back your debt. The first three options may not affect your credit score at all, but these options may not be available depending on our income, expenses, and status of your accounts.
Revive Your Credit After Bankruptcy
If you decide to file bankruptcy, know that your credit isn’t lost forever. Once you’re out of bankruptcy and your finances are back on track, you can focus on rebuilding your credit score. That involves building a positive payment history with new creditors or with any accounts that survived the bankruptcy. You might be surprised to see how soon after bankruptcy you begin receiving credit card offers again.
Bankruptcy remains on your credit report for up to 10 years, but it impacts your credit less as time passes and as you add positive information to your credit report. It’s possible to get to an excellent credit status after bankruptcy, but you have to get through the process first. If, of course, that’s the best option.