What Is Your Credit Score Right After Bankruptcy?

Your credit score is your ticket to credit cards and loans. A high score gives you advantages like mortgages at competitive interest rates and desirable credit cards with reward points. Unfortunately you may overextend yourself financially and feel bankruptcy is the only way out. Bankruptcy hurts your credit score, although you can bring it back up over time.

Definition

Bankruptcy is a court action used by people who cannot pay off their debts. There are three main types of bankruptcy used by consumers, the Bankrate.com financial site explains. Chapter 7 absolves you of paying your debts if your income qualifies, while Chapter 11 and Chapter 13 both create a repayment plan. Chapter 11 is used more often by businesses because it is more complicated, and individuals usually opt for Chapter 13.

Effects

A bankruptcy will pull down your credit score, but the FICO credit reporting company explains the exact amount of impact is different for everyone. Those who had a high pre-bankruptcy score take the biggest hit, while people who already had a low score will only have a small drop. Your score will fall more steeply if you have a lot of accounts included in the bankruptcy. The Electronic Privacy Information Center estimates a typical drop of 160 to 220 points.

Time Frame

Bankruptcy can remain on your credit report for up to 10 years, depending on the type. Chapter 11 and 7 filings stay on your report for an entire decade, while completed Chapter 13 bankruptcies drop off in seven years. Creditors will see it for that entire length of time, so it can continue to affect you. However, FICO states that your most recent history carries more weight than old information. Your credit score will go up as time passes if you make prompt payments on post-bankruptcy accounts and use your credit lines carefully.

Prevention

You may be able to avoid bankruptcy by consolidating your bills through a home equity or debt consolidation loan or by working with a credit counseling agency. A loan lets you pay off your individual bills so you only have one monthly payment. Its interest rate may be lower than some of your accounts, which helps you pay your total debt more quickly. A credit counseling firm evaluates your situation and makes recommendations. It may help if you create a budget to handle the debt on your own or create a debt management plan in which you make your monthly payment to the agency, which then distributes the money to the creditors. Your credit counselor should be able to negotiate lower interest rates as part of the plan. These approaches should not hurt your credit score.

Solution

There are many ways to raise your credit score after bankruptcy. You can get a secured credit card even if you don't qualify for a regular account, Liz Pulliam Weston of MSN Money advises. You give the issuing bank a deposit of $200 or more and it gives you a credit card with a spending limit equal to the deposit. You cannot withdraw the money, and the bank has the right to seize it if you don't make your payments. You will build a positive payment history and raise your score if you handle the secured card responsibly, allowing you to expand to non-secured accounts and loans. Your score will go even higher if you get a mix of account types and handle them responsibly.