How bankruptcy filings affect credit scores

On Behalf of | Jan 8, 2024 | Bankruptcy, Blog |

Filing for bankruptcy can have significant effects on your credit scores, influencing your financial standing for years to come. The impact varies depending on the type of bankruptcy filed—Chapter 7 or Chapter 13. According to Statista, Tennessee ranked third in the nation for bankruptcy filings in 2022, with Georgia being number four.

Despite the challenges, it is possible to rebuild credit after bankruptcy. Initiating small steps, such as obtaining a secured credit card or joining a credit-building program, can contribute to gradual improvement. Consistent, responsible financial behavior is key to showing lenders that you are a reliable borrower.

Chapter 7 bankruptcy

In a Chapter 7 bankruptcy, you will liquidate your non-exempt assets to pay off creditors, providing you with a fresh financial start. However, the bankruptcy will stay on your report for ten years, affecting your credit score during that time.

Upon filing Chapter 7, your credit score will likely experience a significant drop. The extent of the decrease depends on your credit standing before filing. However, as time passes, the impact lessens, especially if you take steps to rebuild your credit responsibly.

Chapter 13 bankruptcy

In Chapter 13 bankruptcy, you create a repayment plan to settle your debts over a three to five-year period. While this allows you to retain your assets, the effects on your credit score are still notable.

Chapter 13 bankruptcy remains on your credit report for seven years. During this time, securing new credit can be challenging. However, by adhering to the repayment plan and managing existing credit responsibly, you can gradually rebuild your credit.

Credit score drops

If your credit score before bankruptcy was 780 or higher, your score might drop by 200 or more points. Lower initial scores probably will not see as much of a difference.

Applying for credit during bankruptcy

Attempting to apply for new loans or credit cards during bankruptcy is challenging. Lenders are often wary of the financial risk associated with individuals undergoing bankruptcy. If you get a loan approval, the terms may be less favorable, including higher interest rates.

Navigating the credit recovery path

While filing bankruptcy has immediate consequences on credit scores, it does not signify a permanent financial setback. By understanding the nuances of Chapter 7 and Chapter 13 bankruptcy and taking proactive steps to rebuild credit, individuals can navigate the path toward financial recovery.


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