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How Bankruptcy Can Demolish Credit Scores

by | Aug 21, 2023 | News

Bankruptcy, a legal process available to both individuals and businesses, is sought when they find themselves unable to meet their debt obligations. It offers a way for debtors to find relief from overwhelming financial burdens and start fresh. In the United States, the most common types of bankruptcy for individuals are Chapter 7 and Chapter 13.

Here’s how bankruptcy can impact your credit scores:

1. Credit Score Impact – Bankruptcy can significantly harm your credit score, which is a numerical assessment of your creditworthiness. Your credit score considers various factors such as payment history, credit utilization, length of credit history, types of credit used and new credit inquiries. Filing for bankruptcy may cause your credit score to drop substantially by several hundred points.

2. Duration on Credit Report – The duration that bankruptcy remains on your credit report depends on the type you file. In the case of Chapter 7 bankruptcy, it typically stays on your report for 10 years from the filing date. For Chapter 13 bankruptcy involving a repayment plan, it usually stays on your report for 7 years from the filing date.

3. Access to Credit – Obtaining credit becomes more challenging after going through bankruptcy. Lenders perceive a higher level of risk due to the recent bankruptcy on your credit record. If you are approved for new credit, you may encounter higher interest rates and less favorable terms.

4. Rebuilding Credit – Despite the negative impact, it is still possible to rebuild your credit following a bankruptcy. It will take time, but practicing responsible financial habits can gradually improve your credit score. This may involve paying bills punctually, using credit responsibly and possibly obtaining a secured credit card or a small installment loan to demonstrate your ability to handle credit effectively.

5. Bankruptcy Information – Details about your bankruptcy, such as its type and filing date, are visible to potential creditors, lenders and individuals who access your credit report. This information can influence decisions related to extending credit, renting housing or providing certain services.

It is essential to note that laws and regulations concerning bankruptcy and credit scores may differ based on the country and region you reside in. If you are contemplating bankruptcy as an option, it is advisable to seek guidance from a financial professional or consult with a bankruptcy attorney in order to comprehend the consequences fully and explore alternative solutions before making any decisions.