Do All Bankruptcies Affect Your Credit?

Declaring bankruptcy always affects your credit, even if your withdraw your case, but not all bankruptcies affect your credit in the same way. Although bankruptcy is the worst item you can have on your credit report, it may not affect your credit rating much. In some cases, a bankruptcy can boost your credit rating -- at least temporarily.

Identification

Whether you file Chapter 7 or 13, a bankruptcy case always affects your credit rating because the credit reporting bureaus search public records for bankruptcies. Voluntarily dismissing your bankruptcy case affects your credit rating too because you had to consider filing in the first place. Chapter 13 bankruptcy only stays on your report seven years after you complete your payment plan and Chapter 7 cases always stay for 10 years. Chapter 13 cases tend to stay the full 10 years because most cases take three to five years to complete.

Effect

Bankruptcy usually lowers your credit rating, but some consumers see a boost to their score because of a bankruptcy case. This occurs because bankruptcy eliminates the history and balances on included accounts -- except for secured debts -- so a single bankruptcy might impact your rating less than years of missed payments and delinquent debt. At the very least, bankruptcy may not lower your score by the 240 points or more damage it does to elite scores, because you already likely have a terrible rating before you file bankruptcy, according to Aleksandra Todorova of Smart Money.

Avoiding Bankruptcy

Go to a credit counselor from one of the major nonprofit credit counseling organizations, such as the National Foundation for Credit Counseling. You have to attend credit counseling to file bankruptcy anyway. The counselor may have options for you to avoid a bankruptcy. For example, the counselor may suggest you settle debts with creditors for a fraction of the balance or the counselor may try to negotiate a single payment to all creditors.

Tip

Once you complete your bankruptcy case, start rebuilding your credit. Begin by assessing your budget and whether it can meet your debt obligations and monthly expenses. If you do not have a savings account, try to put at least $500 in an emergency fund, suggests Liz Weston of MSN Money Central. You need to use credit again to build a good credit rating. You can almost always acquire a secured credit card by putting a security deposit on the credit limit, and the bank may offer an unsecured line after a year or so of no missed payments.