Overcoming Personal and Legal Challenges

Overcoming Personal and Legal Challenges

  1. Home
  2.  » 
  3. Bankruptcy
  4.  » How does bankruptcy affect your credit scores?

How does bankruptcy affect your credit scores?

Filing for bankruptcy can lead to significant changes in one’s financial life. You may wonder how it impacts your credit scores.

Understanding how bankruptcy affects a credit score helps individuals prepare for the consequences and plan for financial recovery.

Lowered credit scores

When someone files for bankruptcy, credit bureaus receive a notification, and the bankruptcy entry appears on the credit report. This entry significantly lowers the person’s credit score because it signals to creditors that the individual has defaulted on many financial obligations. Typically, a bankruptcy can reduce a credit score by 100 to 200 points. This will vary based on the credit status before bankruptcy.

Duration of bankruptcy’s impact

Bankruptcy remains on a credit report for different lengths of time depending on the type of bankruptcy filed. A Chapter 13 bankruptcy stays on the report for seven years, while a Chapter 7 bankruptcy remains for ten years. During this time, the bankruptcy will continue to affect the credit score, but its impact lessens as the years pass, especially if the individual engages in positive financial behaviors.

Recovery from bankruptcy

Recovering from bankruptcy involves a deliberate approach to rebuilding credit. Getting a secured credit card, becoming an authorized user on another person’s card and ensuring all bills are paid on time and in full can help. These actions demonstrate to creditors that the individual is managing their financial responsibilities well, despite the previous bankruptcy.

Long-term effects on borrowing

The long-term effects of bankruptcy on credit scores include increased interest rates on loans and credit cards. You may have some difficulty securing loans, and may also see higher insurance premiums. Lenders see individuals with a bankruptcy history as high-risk borrowers, which often results in less favorable loan terms. However, as individuals continue to engage in positive financial activities and the bankruptcy ages, they can gradually restore their credit.

While bankruptcy can severely affect one’s credit score, understanding and adopting the right financial behaviors can aid in the recovery process. Individuals can gradually improve their credit scores and reduce the impact over time.