Bankruptcy and Bad Credit Scores: How Does Your Filing Affect Your Future?
Updated: Feb 8
Nearly everyone who I consult about a bankruptcy asks me how does bankruptcy affect your credit score? The question is obvious to ask and the answer is predictably that bankruptcy is not good for your credit. A Chapter 7 bankruptcy remains on your credit for 10 years, and a Chapter 13 remains on your credit for seven years.
The not so obvious question to ask and consider is how is bankruptcy going to affect my credit compared to if I do not file bankruptcy? This will vary by person and by scenario, but the majority of people who are considering filing bankruptcy have a bad credit score. That means they are not good candidates to lend to right now and will not be for the foreseeable future either unless they can figure out a way to get rid of their debts.
Considering things from the lenders perspective can help put things in focus. Who is a better credit risk- the person who makes $35,000 per year owes $30,000 in credit card and medical bills and a monthly mortgage and car note payment but has no bankruptcy to their name or the person who just filed bankruptcy and has no unsecured debt and is ineligible to file a Chapter 7 again for another eight years?
This is not to say bankruptcy is always the solution, as sometimes debt settlement is preferable. Or maybe the debtor is underwater on the mortgage and wants to avoid bankruptcy by doing a short sale or a deed in lieu of foreclosure. This is merely to point out that sometimes debtors focus too much on the impact of a bankruptcy on their credit report while ignoring that their current credit score cannot get them much anyway.
I have seen the occasional client who has perfect credit, has not missed any payments, but still wants to file a bankruptcy anyway because the interest rate payments on the credit cards are too high. That person will take a big hit to their credit, but that person is few and far between. When I have met this person before, they are also not someone who is looking for credit anyway. Often times they realize they overextended themselves previously and have already torn up their credit cards.
The important thing to remember if you file bankruptcy and want to build up your credit score is to be wise about the credit you take out post bankruptcy and timely pay off your bills in full every month. This consistent behavior will help build up your credit score. While one cannot expect to be buying a house after bankruptcy with a mortgage for at least three years after the filing, lenders do extend loans for credit cards and car loans immediately after filing.
It is recommended that if the debtor wants to immediately seek credit after filing that he/she does so through a secured credit card until the debtor has demonstrated an ability to timely make all payments. The debtor might even find that he/she enjoys living without a credit card and completely change his/her spending habits.