Of all the reasons that people give for choosing to avoid or delay filing for bankruptcy is the impact on their credit. Bankruptcy will have an immediate and negative impact on someone’s credit, and it will remain on one’s credit report for years.
However, people may overestimate the negative consequences of bankruptcy and how long they persist. The better you understand how bankruptcy changes your credit, the easier it will be for you to make an informed decision about whether personal bankruptcy proceedings might be right for your circumstances.
When you first file, you can expect your credit score to go down considerably
The higher your credit score is at the time of your filing, the more likely it is for you to notice a dramatic, triple-digit reduction in your score. When your bankruptcy first gets reported to the credit bureaus, someone with strong credit could experience a 200-point decline in their credit score. Still, that immediate hit is offset by certain other benefits.
You may have had multiple accounts that were about to become delinquent or go into collections. The more negative marks you have on your credit report, the worse your credit looks. Bankruptcy may be a strong negative mark, but it is one mark that could replace potentially dozens of other collection accounts, past-due revolving credit lines and other major blemishes that would drag down your score.
In the months after you file, you have an opportunity to begin rebuilding
Depending on whether you file Chapter 13 or Chapter 7 bankruptcy proceedings, you may be able to keep certain accounts open. Even if you have to close all of your unsecured lines of credit because of your discharge, it won’t take long for lenders to start courting you for credit cards.
The initial offers you receive will likely include a security deposit requirement or offer unfavorable terms, such as a low credit limit, high fees and high interest rates. Still, the sooner you acquire new forms of credit and make regular payments on them, the sooner your credit score will start to go up to where it once was.
How long does a bankruptcy stay on the credit report?
Even if you have a good credit standing currently, lenders don’t particularly like to see a previous bankruptcy on your credit report. You can likely qualify for much better terms and everything from credit cards to mortgages once the bankruptcy comes off your report.
Typically, that will happen seven years after you complete your repayment plan in a Chapter 13 bankruptcy or 10 years after the date of your discharge for a Chapter 7 bankruptcy. In the long term, a bankruptcy could be better for your credit and finances than continuing to try to sustain your impossible debt situation.