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What Happens To My Credit Score When I File Bankruptcy?

by | Jul 25, 2017 | Bankruptcy

A common concern that many people have when considering filing for bankruptcy relief is how filing a bankruptcy will impact their credit score. You may have heard that filing a bankruptcy case ruins your credit rating forever. While your credit score may be lower for a while, it is not permanent decrease in your credit score. In many cases, filing a bankruptcy case improves your credit score within a year or two after filing.

How Is Your Credit Score Calculated?

Your credit score is a combination of five factors:

  • 35% payment history
  • 30% amounts owed
  • 15% length of credit history
  • 10% credit mix
  • 10% new credit

As you can see from the above information, your payment history and the amount of debt you owe make up over half of your credit score. Most people have already damaged their credit score because of missed payments and too much debt by the time they make the decision to file for bankruptcy relief. The amount a credit score drops when a person files bankruptcy depends in part on the credit score at the time of filing. If you have a low credit score, filing bankruptcy won’t lower your credit score as much as someone with a high credit score. In either case, the damage is temporary, and it can be repaired.

Can Filing Bankruptcy Help Improve My Credit Score?

Filing bankruptcy helps improve the “amounts owed” portion of your credit score by discharging unsecured debt.  The balances on the discharged accounts become zero which helps improve this portion of the credit score. In addition, creditors cannot continue to report late payments on debts that are discharged thereby helping to improve the payment history portion of the credit score. Month after month, the payment history improves without additional late payments being reported by creditors.

By not filing bankruptcy, you prolong the time it takes to improve your credit score. If you don’t pay your debts, creditors continue to report late payments and other negative information. Even if you begin paying the debt, the negative information remains on your credit report for years. When you stop creditors from reporting negative information, the steps you take to improve your credit score going forward count more than they would if they had to battle the continued reports of negative information.

Tips for Improving Credit Scores After Bankruptcy

In addition to filing bankruptcy, you can take steps after your bankruptcy case closes to improve your credit score.

  • Make all future payments on debt on or before the due date to avoid the creditor reporting late payments. One or two late payments can severely lower your credit score, and it takes much longer to undo that damage than it does to cause the damage.
  • After your bankruptcy case is closed, apply for a secured credit card. You must place a deposit with the credit card company; however, using the credit card and making timely payments will help improve your credit rating. Verify that the company does report account information to the credit bureaus.
  • Create and live within a budget. A personal budget helps you identify problems quickly before they become overwhelming.
  • Use the information provided in your bankruptcy courses to manage your finances, including future debt.
  • Don’t close old credit accounts. If a company does not close an account that had a zero balance, leave the account open. Use the account a few times and pay the balance in full. An old account helps to improve your length of credit history.
  • Avoid applying for new credit. It may be tempting to apply for credit cards once your bankruptcy case is completed; however, applying for too many new accounts lowers your credit score in addition to placing you in danger of getting back into debt.
  • Request copies of all three credit reports and review each report carefully. Notify the credit reporting agency in writing of the error and request that the company corrects the error immediately. Keep copies of all information.
  • Open a savings account and add money to it each week. Include this “payment” to yourself in your budget. The account should be used as an emergency account, so you don’t need to use credit when a financial emergency arises.

With patience and hard work, you can improve your credit score and your financial well-being after filing bankruptcy. If you have questions about bankruptcy, seek the advice of a trained, experienced professional.