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How bankruptcy affects credit scores: a timeline

Most Americans experience some type of financial trouble in their lifetime. Struggling through the loss of a job, an unexpected illness or mounting credit card debt causes instability throughout your life. While most people are aware of bankruptcy as a potential solution to debt problems, they worry about personal credit scores and long-term consequences of filing for bankruptcy.

A study by economist Paul Goldsmith-Pinkham charts credit scores before and after filing. The timeline is a clear illustration that credit scores are usually at their lowest before someone files for bankruptcy, not after. Typically, consumers go deeper into the debt and their rating drops in tandem with their borrowing. The rating rises slightly upon filing because debt is discharged at that time. After this, scores usually slowly rise for the next seven to ten years, with another bump when the bankruptcy comes off your credit report entirely.

Full discharge of debts

Many factors go into a credit rating, but the amount of debt plays a prominent role. When a debtor discharges debt, it provides a boost to the rating. In Chapter 7 bankruptcy, debts are fully discharged. Part of the agreement includes getting rid of assets, by either liquidation or seizure. It’s possible to keep select personal property (called reaffirmation) through negotiated agreements.

Credit scores, history and future

The three major credit companies, TransUnion, Experian and Equifax, keep Chapter 7 bankruptcy on record for seven years, with a maximum length of 10 years. As the Goldsmith-Pinkham chart reflects, bankruptcy calms a troubled situation, with a slow climb back to normal ratings as the debtor resumes a steady financial picture. Finally, the agencies remove the bankruptcy flag.

Bankruptcy will affect your credit score, requiring a careful examination or your personal finances as you move forward. However, the picture that Goldsmith-Pinkham paints is that bankruptcy itself isn’t the credit crash—debt is the cause. Bankruptcy stabilizes the situation so your score can recover, setting you on the path for a brighter future.

Whether recovering from a medical condition, a credit card problems or any major life event that shook your finances, bankruptcy provides a way out of a tenuous situation. An experienced bankruptcy attorney can help you explore if Chapter 7 is the right fit for you, including helping you navigate the legal system and negotiate with creditors to make sure that you find a solution that fits your lifestyle.

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