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What impact does bankruptcy have on someone’s credit score?

On Behalf of | Sep 13, 2023 | Bankruptcy

What people know about bankruptcy can often deter them from filing for debt relief. For example, a surprising number of people avoid bankruptcy because they have heard that it will drag down their credit score and leave them ineligible for the credit that they need for day-to-day life.

While bankruptcy will obviously affect someone’s overall credit score and perceived creditworthiness, the impact is not as extreme or long-lasting as some people have been led to believe. What can people expect to happen with their credit if they decide to file for personal bankruptcy?

Their score will take a drop

People can expect a very significant drop in their overall credit score when they file, particularly if they have thus far avoided missing any payments or having a creditor secure a judgment of against them. It is common for someone’s credit score to drop by as much as 200 points after a bankruptcy. However, the impact of the bankruptcy on someone’s creditworthiness will diminish a little bit every month. As more time passes, their score will begin to creep up as the bankruptcy will have a less damaging effect on their score.

Rebuilding can start right after discharge

Hopefully, the person who filed will also open new lines of credit after their discharge, which they can use to establish a history of making on-time payments that will further improve their credit score. With concerted efforts, many people who file for bankruptcy will find that their credit score is nearly back to their post-filing score even before the bankruptcy comes off of their credit report.

Credit cards and other small, likely secured, lines of credit may be available within just a few weeks of someone’s discharge. They may qualify for suboptimal terms on larger credit instruments within a few years and will find that the bankruptcy has zero impact on their credit after it comes back off of their credit report after seven or 10 years, depending on the type of bankruptcy they filed.

Too many adults struggling financially focused on the negative impact that bankruptcy will have on their credit instead of recognizing how it will benefit them. All of their current late payments and other blemishes will end up replaced by that single bankruptcy mark, and that will also eventually come off of their credit report as well.

Understanding how bankruptcy affects an individual’s credit score might help individuals to make a better choice about whether they could significantly benefit from filing or not.

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The Law Office of Kim Covington, is a woman owned debt relief agency, and I have helped families, individuals and small businesses, file for bankruptcy relief under the U.S. Bankruptcy Code, for over 24 years.