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How Bankruptcy Affects Credit Score

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In a Nutshell

There are a lot of misconceptions about the ways bankruptcy affects credit score. In this article, we'll dispel some of these myths and provide information on how to improve your credit score after bankruptcy.

Written by Kristin Turner, Harvard Law Grad
Updated September 22, 2021

One of the first things that will go through any individual's mind when considering bankruptcy is how filing for bankruptcy affects credit score. It's an important financial decision, and being informed about how it will affect your financial standing is essential.

However, there are a lot of misconceptions about the ways bankruptcy affects credit score. In this article, we'll dispel some of these myths and provide information on how to improve your credit score after bankruptcy.

The Truth About How Bankruptcy Affects Credit Score

It's a common misconception that filing for bankruptcy will ruin your credit score for good.

The fear of how bankruptcy affects credit score can discourage a lot of individuals from seeking bankruptcy as a way of repairing debt. The truth is that individuals considering bankruptcy usually already have damaged credit scores from missed payments and multiple open accounts.

Bankruptcy affects credit score by bringing your score down a bit, but not by nearly as much as you would think. The majority of individuals considering filing for bankruptcy won't feel a serious impact on their credit score. This is because their scores likely weren’t high in the first place, which is why they need bankruptcy relief. Bankruptcy can wipe your debts, giving your credit an opportunity to rise and recover from financial hardship.

Bankruptcy offers a fresh start for struggling individuals to get their finances back in order. If you're struggling to make payments on credit and debt, avoiding bankruptcy can actually make it more difficult to get back on your feet. The result is more financial stress and harm done to a person's credit that could be prevented through bankruptcy.

How Long Do the Effects of Bankruptcy Stay on Your Credit Report?

A Chapter 7 bankruptcy filing will stay on your credit report for ten years. That may seem like a long time at first, but the other components of your bankruptcy filing, like trade lines, judgments, and tax liens, will all be removed from your report by the seven-year mark of your bankruptcy filing. And, it usually doesn't even take that long! So the ways that bankruptcy affects your credit score are relatively temporary.

As all of these factors start to be erased from your credit history, your credit score will continue to go back up. If you choose to focus on rebuilding your credit score (which is highly recommended), you'll see it rise back up even faster. So, even though ten years may seem like a long time, it doesn't mean ten years of bad credit; only ten years of it appearing on your credit.

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Factors That Impact Your Post-Bankruptcy Credit Score

The ways that bankruptcy affects credit score are temporary, while the benefits are long term. Bankruptcy provides you with a great opportunity to start clean and rebuild your financial situation. The slight drop you experience after filing is usually outweighed by the amount your score will improve over time.

You can begin building your credit score back up shortly after your debts are discharged. As you rebuild, you should be aware of the factors that impact your credit score after you file for Chapter 7.

(-) Bankruptcy appears on your credit report. As mentioned above, bankruptcy will appear on your credit report for ten years after you file. Although many people are overwhelmed by that amount of time, it goes by faster than you think.

Having the ways that bankruptcy affects credit score appear on your credit report will not prevent you from taking active steps to rebuild your financial help. You’ll be in a much better position than you were before filing long before the ten years has passed.

(+) Less debt on your credit report. Filing for bankruptcy successfully will discharge the majority of your debts just a few months after being approved. And, they'll be completely removed from your credit report within a few years. Your debts generally stop affecting your credit score before the ways that bankruptcy affects credit are removed from your report. This means that although bankruptcy affects credit reports, your credit score will improve almost immediately once the debts are removed.

(+) Credit-to-debt ratio. You might even see a slight improvement in the months after your debts are discharged thanks to your “credit utilization rate.” This rate compares the amount of debt you are carrying to your overall credit limits.

Since the debt you're carrying goes away before the ways that bankruptcy affects credit, your credit utilization rate could improve (depending on your credit limits), giving your score a positive bump. Having a positive credit utilization rate (low amount of debt on a few accounts) will also lessen how much bankruptcy affects credit score.

The thought of the ways that bankruptcy affects credit reports is likely daunting for a lot of individuals. However, the effects are temporary and will lessen at a consistent rate after your filing.

Developing a Credit Improvement Strategy After Bankruptcy

Check your credit report. The first step towards improving your credit score after bankruptcy is to get a credit report. Review it with a careful eye and ensure that all of your debts have been properly discharged.

You're entitled, by law, to one free copy of your credit report from a major credit bureau every twelve months, so it shouldn't cost you anything to start examining your score. Once you have looked over your credit report and have a thorough understanding of where you stand, it's time to start rebuilding your score through new, low-risk lines of credit.

If you owed student loans before filing for bankruptcy, you'll notice that they are not among your discharged debts. They usually aren't eligible for discharge unless the judge believes you won't be able to repay them. While this may feel like a negative, it just means you have one extra way to start rebuilding your credit. Repaying your student loans on time will improve your credit score and remove old debt from your report.

Set a budget. Like anything in life, having a solid plan will set you up for success better than just about anything. When it comes to finances, the ultimate way to prepare for positive results is a budget.

If you've never set up a budget before, there are plenty of great resources online to walk you through the process. Not only do they relieve a lot of stress, but they also help you keep track of where your money is going, and help you cut costs in certain areas.

Start saving. Once you've got a responsible budget in place, you'll know how much free cash you have left over each month after all of your bills, debts, and necessities are taken care of. Use this money to start establishing an emergency fund. Even if it's only a small amount being set aside each month, it'll add up quicker than you think.

Having an emergency fund set aside will cushion against unexpected expenses. This way you are still able to make payments on current and past debts without having to take out emergency loans.

Get a secured credit card or credit-building loan. After you file for bankruptcy, it's important to start rebuilding your score as soon as possible. This will lessen the ways that your bankruptcy affects credit score and improve your standing among potential lenders. You can start to improve your credit score by carefully taking on new forms of credit and re-paying them on time.

Secured credit cards and small loans are a great way to start rebuilding your credit score. They are specifically made for individuals to recover their credit scores. Secured cards are a great resource to help get your credit score back in shape.

Using Credit Cards To Repair Your Credit Score

While you may think you won't be able to be approved for credit cards after bankruptcy, there are plenty designed with the sole purpose of helping individuals rebuild their score and develop healthy credit habits. The two kinds of credit cards you can use to rebuild your credit: unsecured and secured. While we discuss unsecured cards below, secured credit cards tend to be the best bet when you’re reducing the ways that bankruptcy affects credit score.

Unsecured cards:Unsecured cards only require you to meet their approval standards in order to obtain a line of credit. While they are more tempting on the surface, they're usually harder to obtain and carry harsher penalties for missed payments.

Secured cards: Secured cards have collateral at stake, typically an initial deposit. The initial deposit is usually the same as the amount of monthly credit on your line. For example, if you deposit $200, you'll be allowed $200 of credit each month. This means that the lender will be covered if you miss a payment, allowing for lower interest rates and more lenient approval requirements.

After you close a secured line of credit, assuming your payments have all been made, your deposit will be returned. Not only that, but many secured card providers offer their cardholders the opportunity to graduate to an unsecured card, so long as their spending habits meet certain requirements. In this event, your deposit will be returned without the need to close the line.

While some of these cards will offer rewards for their users, the primary focus is on rebuilding credit score. Use these cards responsibly, know what you can afford, and always make your payments on time.

Other Ways To Improve Your Credit Score After Bankruptcy

While secured credit cards are one of the easiest ways to improve your credit score, they aren't the only way. Taking on different forms of debt and paying them each on time will diversify your credit mix as well -- improving your creditworthiness even faster. The two main ways to up your score, other than a secured card, are: credit-builder loans and becoming an authorized user.

Get a credit builder loan. A credit-builder loan is a loan with no other purpose than to help you improve your score. The lender will approve you for a loan amount based on your income and expenses (meaning you have the highest possible chance of making timely payments). They then approve you for the amount, but, unlike a traditional loan, they don't give you any money.

Instead, they place that money into a savings account and have you make monthly payments on it as if you had been given the money. Once you've paid it off completely, they then release the money to you.

These loans help you rebuild credit with as little risk of missed payments as possible. Plus, once the money is released to you, you can put it straight into an emergency savings fund!

Become an authorized user. You can also become an authorized user on a family member or close friend’s card. This route may not be an option for everyone. But, if you have a willing family member with a good credit history, this is a great way to improve your own standing. So long as you work together to make timely payments, both of your credit scores will benefit.

Why It's Important To Improve Your Credit Score After Bankruptcy

Improving your credit score after bankruptcy is important for a variety of reasons. The most immediate reason is that improving your credit score will improve your standing with lenders and help you gain approval for loans and mortgages. Having a better credit score will also allow you to secure better lines of credit with lower interest rates, saving you money over time.

The ways that bankruptcy affects credit score will go away on their own as time goes by. Although it may sound strange at first, taking out new lines of credit and managing them responsibly will help you get back to normalcy as quickly as possible. Plan carefully, borrow wisely, and set yourself up for financial success! The sky's the limit after you get a fresh start!

Written By:

Kristin Turner, Harvard Law Grad


Kristin is a recipient of Harvard Law School’s Public Welfare Foundation A2J Tech Fellowship. At Harvard Law, she served as a member of the Harvard Defenders, the Women’s Law Association, and the Harvard Law Negotiation Review. She was the 2016 – 2017 president of the Harvard Bla... read more about Kristin Turner, Harvard Law Grad

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