Bankruptcy & Credit Rating

Consumers are typically told to avoid bankruptcy --- it is the worst thing to appear on a credit report. However, the impact bankruptcy has on a credit profile typically depends on where you started off from and any other negative data in your credit history, such as late payments. In some cases, bankruptcy can help improve a credit score.

Identification

A bankruptcy hurts the most when you enter into your case with an excellent score --- higher than 760. In a 2010 study of its own data, the Fair Isaac Corporation discovered that a score of 780 could drop as low as 540 after bankruptcy, putting the consumer the worst category of borrowers. A consumer with a 680 would probably bump down to no less than 550 and possibly as far as 530.

Possible Improvement

Bankruptcy could slightly improve your credit score, according to SmartMoney. You can wipe out most unsecured debts in a Chapter 7 case, and even in Chapter 13 accounts will change to "included in Chapter 13" and eliminate any previous written down debt and missed payments. This usually only helps your score if it is already extremely low, such as in the 500s or low 600s.

Time Frame

The credit bureaus can only legally report a Chapter 13 bankruptcy for seven years and a Chapter 7 for 10. Before the bankruptcy even falls off your credit report, lenders might be more willing to take a chance on you than before you declared bankruptcy. This often happens, because post-bankruptcy finances are usually in much better shape, and you cannot declare bankruptcy again for several years. Thus, unsecured creditors do not need to fear the debtor discharging the debt in bankruptcy.

Tip

Once you complete your bankruptcy proceeding you should begin building credit right away, and you can probably almost completely recover in a few years. Start by taking out a secured card. The lender gives a line backed by whatever collateral you provide, so creditors rarely reject applications for this kind of account. You could cosign on a loan --- building credit for both of you --- if a person agrees to let you become a joint account holder.