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What Are the Short- and Long-Term Credit Impacts of Bankruptcy?

March 6, 2020

One of the most common reasons people give for not wanting to file bankruptcy is concern about the impact of bankruptcy on their credit score and future creditworthiness. Most people only know that bankruptcy will have an immediate negative impact on their score and will be on their credit report for years.

What they may not realize is that filing personal bankruptcy may have less of an impact than multiple negative marks over time or that it lays the foundation for better credit in the future. The better you understand the way that bankruptcy impacts your credit score and credit report, the more capable you will be of making an informed decision.

Filing Bankruptcy Will Have an Immediate, Massive Effect on Your Score

When you file for bankruptcy, you might not want to even look at your credit report for a month or two if your score matters to you. That’s because filing for bankruptcy usually results in a rapid drop of between 160 and 220 points.

Even someone with a previously stellar credit score of over 800 will likely struggle to secure any kind of credit after that kind of drop, to say nothing of the impact of a fresh bankruptcy on how your credit appears to potential lenders. However, while that drop is significant, the negative effect of bankruptcy on your score goes down as time passes.

After a few months, you may be able to obtain high-interest-rate or secured credit cards. Within a year or two, you may be eligible for vehicle loans or even mortgages. The longer it’s been since you filed and the better you’ve been at establishing good credit since then, the sooner you’ll be eligible for good credit offers again.

How Long the Bankruptcy Gets Reported Depends on The Kind You File

For the average consumer, their bankruptcy will either be a Chapter 13 or Chapter 7 filing. Chapter 7 filings have income limitations because of how quickly the person filing receives the discharge of their unsecured debt. Provided that you pass the means test and then secure a Chapter 7 discharge, your bankruptcy will stay on your credit report for an entire decade.

If you file for Chapter 13 bankruptcy, you will likely have a repayment plan that lasts three years. The discharge will then take effect after you complete that repayment plan. The courts will report your bankruptcy to the credit bureaus for seven years after your discharge for Chapter 13 proceedings.