What Happens to Your Credit Score After Filing for Bankruptcy? Berken Cloyes

Filing for bankruptcy can be an overwhelming and emotional process, but sometimes it’s the necessary step to take when you’re overwhelmed by debt. While bankruptcy offers individuals a chance to get a fresh financial start, it also comes with long-term consequences — most notably, its impact on your credit score.

If you’re in the Denver area and considering bankruptcy, it’s important to understand how filing for bankruptcy can affect your credit score, and how you can begin rebuilding afterward.

How Bankruptcy Affects Your Credit Score

When you file for bankruptcy, it remains on your credit report for several years, which will directly impact your credit score. However, the extent of the impact can vary depending on a few factors, such as the type of bankruptcy you file (Chapter 7 vs. Chapter 13), your credit history before filing, and how you manage your finances after bankruptcy.

Chapter 7 Bankruptcy and Credit Score
Chapter 7 bankruptcy, also known as liquidation bankruptcy, typically wipes out most unsecured debts, including credit card balances, medical bills, and personal loans. It is one of the most common types of bankruptcy filed, and it generally results in a significant drop in your credit score.

Here’s why:

Late Payments and Defaults: Before filing for Chapter 7, most individuals have already missed payments, defaulted on loans, or accumulated large amounts of debt. These issues can significantly reduce your credit score.
Bankruptcy Filing: After you file, bankruptcy itself will be reported to the credit bureaus, causing your credit score to drop further. A Chapter 7 bankruptcy will remain on your credit report for up to 10 years.

Even though your score will drop significantly after filing for Chapter 7 bankruptcy, many individuals find that their score begins to rebound over time, especially if they are proactive about managing their finances going forward.

Chapter 13 Bankruptcy and Credit Score
Chapter 13 bankruptcy is a reorganization bankruptcy where the debtor repays a portion of their debts over a 3 to 5-year period. Unlike Chapter 7, Chapter 13 bankruptcy does not completely wipe out your unsecured debts. Instead, you work with the court and creditors to create a manageable repayment plan.

In terms of your credit score:

Less Severe Initial Drop: Although filing for Chapter 13 bankruptcy will cause your credit score to drop, the impact is usually less severe than a Chapter 7 filing. This is because you’re still repaying some of your debts, which signals to creditors that you’re making an effort to meet your obligations.
Bankruptcy Remains for 7 Years: A Chapter 13 bankruptcy will remain on your credit report for 7 years, but since you’re paying down your debts, your credit score may improve more quickly than with Chapter 7.

Ultimately, the fallout from bankruptcy will depend on the type of bankruptcy and the current state of your credit. If your credit score was already low due to missed payments or high debt, bankruptcy could still improve your financial situation in the long run by clearing debts and creating a path toward recovery.

Rebuilding Your Credit After Bankruptcy

While bankruptcy significantly impacts your credit score, it doesn’t have to be the end of your financial future. With time, discipline, and careful financial management, you can begin to rebuild your credit score. Here are a few steps to help you rebuild your credit after bankruptcy:

Check Your Credit Report: Once your bankruptcy is finalized, the first step is to check your credit report to make sure all the debts that were included in the bankruptcy are marked as “discharged” or “included in bankruptcy.” If there are any discrepancies, it’s important to dispute them with the credit bureaus.
Settle Old Accounts and Pay on Time: Even though you’ve gone through bankruptcy, it’s important to continue paying bills on time. Start with small, manageable accounts like utility bills or a secured credit card. On-time payments will gradually improve your credit score, showing creditors that you can manage credit responsibly.
Apply for a Secured Credit Card: A secured credit card can be a great way to begin rebuilding your credit. These cards require a deposit that acts as your credit limit, which reduces the risk for the lender. By using the card responsibly and paying it off each month, you can begin to improve your credit score.
Keep Your Credit Utilization Low: Once you’ve started using credit again, be mindful of your credit utilization ratio. This ratio is the percentage of your available credit that you’re using. Keeping your balance below 30% of your total credit limit will have a positive impact on your credit score over time.
Consider Becoming an Authorized User: If you have a family member or close friend with good credit, ask them if you can become an authorized user on their credit card. As an authorized user, you’ll benefit from their good credit history without being responsible for the payments. This can boost your credit score as long as the primary account holder maintains a positive payment history.
Be Patient: Rebuilding your credit after bankruptcy is a marathon, not a sprint. While your credit score may not improve overnight, consistent, responsible behavior will lead to gradual improvement. It can take a few years, but your credit score will likely improve as your financial history becomes more positive.

Consult with a Bankruptcy Lawyer in Denver, CO

Filing for bankruptcy is a significant decision, and understanding its effects on your credit score is essential for making informed choices about your financial future. If you are considering bankruptcy in the Denver, CO area, contact Berken & Cloyes today.

Our attorneys are here to help you navigate the complexities of bankruptcy and take the necessary steps toward financial recovery.