Almost every potential bankruptcy client will ask, “How will filing bankruptcy affect my credit score?” Unfortunately, this important question is often answered flippantly, as in: “If you need to file bankruptcy, isn’t your credit already ruined?” or “What do you need credit for?”
Instead, of brushing aside this question, let’s tackle it head-on and examine what happens to a credit score after bankruptcy.
Bankruptcy’s effect on an individual’s credit report depends on a number of factors. Perhaps the best way to get to the truth of the matter is to view an example posted on myfico.com, the consumer division of Fair Isaac. The FICO score is the credit score that lenders use most often today. In this example, two consumers, Alex and Benecia are compared:
|Alex has a FICO score of 680 and:||Benecia has a FICO score of 780 and:|
|Has six credit accounts, including several active credit cards, an active auto loan, a mortgage, and a student loan||Has ten credit accounts, including several active credit cards, an active auto loan, a mortgage and a student loan|
|An eight-year credit history||A fifteen-year credit history|
|Moderate utilization on his credit card accounts (his balances are 40-50% of his limits)||Low utilization on her credit card accounts (her balances are 15-25% of her limits)|
|Two reported delinquencies: a 90-day delinquency two years ago on a credit card account, and an isolated 30-day delinquency on his auto loan a year ago||Never has missed a payment on any credit obligation|
|Has no accounts in collections and no adverse public records on file||Has no adverse public records on file|
|Current FICO score||680||780|
|Score after one of these is added to credit report:|
|Maxing out a credit card||650-670||735-755|
|A 30-day delinquency||600-620||670-690|
|Settling a credit card debt||615-635||655-675|
Note that after filing bankruptcy (any chapter) both Alex and Benecia have credit scores in the mid-500s. Consequently, most bankruptcy debtors can expect a credit score in the 500s immediately after filing bankruptcy.
Fortunately, that’s not the end of the story.
Most bankruptcy debtors are able to rebuild relatively quickly. Some analysts project an individual with a 680 credit score can rebuild to a 680 credit score in approximately five years after filing bankruptcy. The truth is that it depends on the individual and the situation, sometimes taking less than two years with active attention to re-establishing credit and paying bills on time.