What Happens to a Credit Score After Bankruptcy?

Bankruptcy is generally the worst single item to have on your credit report. It is worse than foreclosure because the bankruptcy usually includes more accounts than the one mortgage in the foreclosure. If you are considering declaring bankruptcy because you cannot handle your bills, consider its effect on your credit score and make a plan for how to rebuild your credit.

Score Usually Drops

The exact change in your FICO credit score after you file bankruptcy depends largely on what your credit looked like before bankruptcy. For example, the FICO website estimates that someone with a credit score of 780 before bankruptcy could see the score drop as much as 240 points after bankruptcy. However, someone with a score of 680 before bankruptcy would not see as significant of a change, with the score likely dropping no more than 150 points. However, Smart Money points out that someone who had a very bad credit score due to many missed payments and high balances could see a slight rise in his credit score after bankruptcy because these accounts will no longer count as strongly against him.

Accounts Closed

After you file bankruptcy, all of the accounts included in the bankruptcy should appear on your credit report with a balance of zero and a notation that they were part of the bankruptcy. Check your credit report to ensure that accounts are reported accurately. The closed accounts affect your ability to boost your credit in the future because you will no longer be able to make payments on these debts and build a consistent payment history.

Time Frame

A bankruptcy remains on your credit report for seven years if it was Chapter 13, or 10 years if it was Chapter 7 or 11. During this time, the bankruptcy will continue to have a negative impact on your credit score, although the impact will lessen over time. If you are diligent to rebuild your credit, you could see a score in the low 700s after just a few years, according to Smart Money. Part of why this is possible is because people with bankruptcies are compared against one another when calculating credit scores. Therefore, if you do better than other people who have declared bankruptcy, you can end up with a better credit score.

Rebuild Credit

One of the most important steps to take after bankruptcy is to start managing credit again. If you had a student loan that was not discharged, make consistent payments on this to help your credit score. MSN Money recommends getting a secured credit card, using no more than 30 percent of your credit line each month and paying every bill in full to help rebuild credit. After one year of using a secured credit card, the lender will probably convert it to an unsecured card and refund the security deposit. Getting an auto loan or mortgage a few years after the bankruptcy and making consistent payments on those can also help rebuild credit.