What Happens When You Have a Bankruptcy on Your Credit Report?

Bankruptcy on Your Credit Report
Bankruptcy on Your Credit Report

In a lot of ways, filing for bankruptcy protection is like throwing your credit score out of a plane with no parachute. Yes, it will plummet. However, that doesn’t mean you can’t achieve a soft landing  — of sorts.

Here’s what happens when you have a bankruptcy on your credit report.

A Lot Depends on Your Score Before The Filing

In most cases, by the time you file for bankruptcy protection, your credit score has already lost a lot of altitudes. After all, a filing is usually preceded by a period of spotty bill paying, which of course takes a toll on your credit history all on its own.

Thus, by the time you get to the bankruptcy filing, it might not have much farther to fall. According to FICO, a 700 credit score could be reduced to 500 after filing. On the other hand, if you’re at 680 or less, you’ll only see a drop of about 130 to 150 points.

Of course, this does still put you in the low 500s.

All Bankruptcies Are Not Created Equal 

Most consumers choose between Chapter 7 and a Chapter 13 filing.

Under Chapter 7, the liquidation of certain assets will be undertaken to generate the funds to pay off as many of your creditors as possible. The court will then discharge all of your other eligible debts once those funds have been exhausted.

While Chapter 13 also discharges some debts, payment plans are worked out for others to help you make those creditors whole over a three- to five-year period.

Care to guess which one lenders like more? This is why a Chapter 7 filing stays on your credit reports for 10 years, but a 13 drops off after seven.

Raising Your Score is a Possibility in the Interim

While most unsecured debt will go away in a bankruptcy filing, you can try to work out debt relief deals with some of your creditors before filing to minimize the fallout — so to speak. Having as many positive accounts on your record as possible will help lenders view you more favorably post filing.

You can also use the reset a bankruptcy filing provides to adopt better credit habits to help you avoid getting into trouble again. The sooner you embrace these more responsible behaviors, the faster your credit score will recover. Afterward, be careful to only take on debt you can pay off each month and keep a watchful eye on your credit reports as well as your credit scores. If you need more advice, trying to lower your monthly payment through a consumer proposal that gives you immediate relief and extends the time you have to pay off the debts.

Yes, You Can Get Credit Again Right Away

This might come as something of a surprise, but you can get credit again within a few months of filing for bankruptcy protection. You might even start seeing pre-qualified offers showing up in your mail queue in a few weeks.

This is because lenders know you can’t get out of what you’ll owe them by filing bankruptcy again right away. Moreover, they know you’ll be so happy someone is willing to work with you, you’ll be less likely to balk at the astronomical interest rates they’ll impose.

That, in a nutshell, is what happens when you have a bankruptcy on your credit report. The good news is it won’t be the end of the world as you know it. However, you will experience a few setbacks with which you’ll have to deal.

Again though, your credit score will recover if you put in the work. What’s more, lenders will still be willing to loan to you — albeit at near usurious rates of interest. And, it will drop off of your record altogether after seven to 10 years, depending upon the type of filing you pursue.