Bankruptcy and Your Credit FAQ

Essential questions to ask yourself about your credit and bankruptcy.

How will bankruptcy affect my credit score?

Many people considering Chapter 7 or Chapter 13 bankruptcy are worried about the effect bankruptcy will have on their credit scores (you have more than one). Although creditors don't like to see bankruptcy on your credit report, the damage it will do to your credit scores depends, in large part, on how good your credit was before you filed.

If you're delinquent on many accounts and your debt-to-asset ratio is high (meaning you have lots of debts and few assets), your credit is already in the tank. If you file for bankruptcy, your scores will take a dip, but it won't take a huge plunge. If, on the other hand, your credit is good before you file for bankruptcy, then your scores will take a much bigger hit post-filing.

Will bankruptcy ruin my good credit score?

If you have good credit scores, filing for bankruptcy will definitely damage them. According to FICO (the most widely-used credit scoring company in the U.S.), those with good credit should expect a huge drop in their scores immediately after filing for bankruptcy.

What if I have a bad credit score?

If your credit scores are already low before you file for bankruptcy, then bankruptcy will cause a more modest drop in your scores.

Is Chapter 13 bankruptcy better for my credit than Chapter 7 bankruptcy?

According to FICO (again, the most widely-used credit scoring company in the U.S.), whether you file for Chapter 13 or Chapter 7 bankruptcy makes no difference to your credit scores. But it's possible that a potential creditor viewing your credit report might look upon one type of bankruptcy more favorably than another. For example, some creditors might view someone who files for Chapter 13, in which you repay some or all of your debts over a three- to five-year period, as more responsible, and thus a better credit risk, than someone who files for Chapter 7.

Can bankruptcy ever help improve a credit score?

Bankruptcy won't provide immediate improvement to your credit scores, but it can be the quickest way to better credit for many people. Here's why: If you're already behind on debt payments or have accounts in collection, bankruptcy can help get you back on your feet sooner than other types of debt management programs. That's because bankruptcy gets rid of many types of debts and provides you with a fresh financial start. When you reduce your debt load and get your finances under control, you can start making loan and credit payments on time, reduce your debt-to-income ratio, and take other steps to rebuild your credit.

But if you don't file for bankruptcy and continue to limp along—making late payments, defaulting on debts, and increasing the amount of debt you have compared to your income—you'll never be able to improve your credit.

Keep in mind, though, you probably have other options for getting a handle on your debt other than bankruptcy. Check out all the alternatives to see what option is best for you. When in doubt, consult with an attorney.

Will I be able to get loans or credit after I file for bankruptcy?

Whether you can get loans or credit immediately after bankruptcy depends on what kind of credit you're seeking.

Credit cards. Many bankruptcy filers are bombarded with credit card offers after the bankruptcy is over. Credit card companies know you can't file again for several years (which means you can't discharge any credit card debt you run up during that time), so they might be eager for your business. But beware—the credit card offers will likely have very high interest rates, annual fees, and other high charges.

Car loans. Most likely you'll be able to get a car loan right away. But you'll be dealing with subprime lenders, which means high interest rates and other unfavorable loan terms. (There are auto loan services for those who have been turned down in the past due to bankruptcy. You can see if you qualify for a car loan after your bankruptcy.)

Mortgages. How long it will take to qualify for a mortgage depends, in large part, on the mortgage lender. You might qualify for an FHA-insured mortgage even before you complete a Chapter 13 plan and two years after a Chapter 7. For conventional loans, if your lender sells its loans to Fannie Mae, for example, you'll have to wait at least two years from the discharge date after a Chapter 13 bankruptcy (four years from a dismissal date) and four years after a Chapter 7 bankruptcy discharge or dismissal date (unless there are extenuating circumstances, and then the waiting period is two years). If your lender doesn't sell its loans to Fannie Mae, you might have to wait even longer.

These are minimum wait periods—it might take longer to qualify for a mortgage. Other factors that affect your qualification include your income, your debt load, how large your down payment will be, and more.

How long will bankruptcy stay on my credit report?

If you file for either Chapter 7 or Chapter 13 bankruptcy, it will appear on your credit report for up to ten years.

If you apply for a loan or life insurance policy in an amount greater than $150,000 or apply for a job with an annual income greater than $75,000, credit reporting agencies can report your bankruptcy longer than ten years. As a practical matter, however, most credit reporting agencies will delete the bankruptcy after ten years.

Can I improve my credit score after bankruptcy?

Even though bankruptcy remains on your credit report for up to ten years, you can start rebuilding your credit right away. Credit scoring companies look at several factors when computing your scores:

  • your payment history (whether you pay bills late or have filed for bankruptcy)
  • your outstanding debt
  • the length of your credit history, and
  • how much new credit you've applied for.

You can start to improve your credit after bankruptcy by making all of your payments on time. Keep your debt load low, especially as compared to your available credit. And when you are ready, get a credit card, make small charges, and pay the bill off in full every month.

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