Credit Scores After Bankruptcy

Clients almost always ask about the affect of bankruptcy on their credit score.  Most often, they already assume that bankruptcy will ruin their credit for a long time but this may not be the case. 

A good credit score comes from paying bills on time.  That is the one and only way to improve your credit score.  Most often, bankruptcies are filed because people have not been current on their bills and continuing to not pay bills on time will wreak havoc on your credit rating.   Bankruptcy prevents default payments on bills and thus, can be a means to rebuilding your credit score.  In some cases, there may be a boost in credit scores after filing bankruptcy.  Usually, the lower your score is at the time of filing, the biggest jump you will see and with most people who file, they're usually at the lower credit score range.

Here's how it works.  Credit scores are determined by comparing people in the same financial situation.  Thus, those who file bankruptcies will be compared to other bankruptcy filers.  Thus, because you are not being compared to those with a perfect credit score, filing bankruptcy won't have too great of an effect on your credit score.  When bankruptcy is filed, the balances of all debts included in bankruptcy will reflect $0 balance on your credit report and will be notated as "included in Chapter 7 bankruptcy or Chapter 13 plan."   The type of bankruptcy you file does not make a difference.  They both have the same affect on your credit score. 

Typically, the bankruptcy will stay on your credit report for about 10 years.  You will receive higher interest rates and in some cases, a co-signer will be required for some loans as long as you have the bankruptcy included in your credit report. However, it is possible to get financing for cars or even home loans.  Most home loans, including FHA loans, are offered two years after discharge in bankruptcy.  Some car dealerships will offer financing as soon as few months out of bankruptcy.

 Thus, filing bankruptcy will not be the end to having credit.  It's a means to start over and reestablishing your credit.   Many find it a good means to prepare for the future by getting rid of their financial mistakes of the past and rebuilding to have financing opportunities in the future.