How Will Filing for Bankruptcy effect My Credit Score?
It’s not unexpected that filing for bankruptcy impacts a credit score negatively. However, the damage to a credit score caused by bankruptcy isn’t permanent, and filing might be the best way out of an impossible financial situation. Bankruptcy changes a credit report in several ways and the most glaring impact is that the evidence of bankruptcy remains on a credit record for a decade.
Types of Bankruptcy
A debtor may choose to undergo Chapter 7 bankruptcy, which requires a liquidation of assets and results in a discharge of debt. Alternatively, a debtor might file Chapter 13 bankruptcy, which is a reaffirmation of debts and a court-approved payment plan. Each of these bankruptcies is reported to credit agencies for 10 years.
If a borrower chooses Chapter 13 bankruptcy, the filing may remain on the credit report for an additional 2 years because after a payment plan is concluded, the bankruptcy will still be reported to the credit reporting agencies for up to 7 years. With a payment plan of up to 5 years, Chapter 13 bankruptcy could appear on a credit report for a total of 12 years.
Credit Score Drop
One of the most common questions asked about bankruptcy and credit reports is how many points will be lost on a credit score after filing. There is no set number on how many points a bankruptcy may deduct from a credit score; however, a person with a higher credit score may suffer a larger point drop than someone with a lower score.
For example, someone who has a credit score of 750 could see a drop of 200 points while another debtor with a score of 650 could see a drop of 125 points. The result would be that each person had around the same credit score post-bankruptcy. The number of points lost depends upon the circumstances of each borrower.
Improve Borrowing Behavior
It’s essential to remember that bankruptcy isn’t the only issue that might reduce a credit score. Late payments, maxed-out credit cards, and high debt may lower a credit score even more than bankruptcy. The caveat regarding a bankruptcy filing is that the debt is discharged, but the evidence remains on a credit report for a decade.
A credit score is important, but when bankruptcy exists as one of the only solutions for an individual or family’s financial hardship, that score shouldn’t be the determining factor on whether filing would be a good idea.
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