Bankruptcy and Foreclosure on a Credit Report

Bankruptcy and foreclosure can be two of the most disastrous financial events a person can face. In a foreclosure, a bank takes possession of an individual's home due t the homeowner failing to pay his mortgage. In a bankruptcy case, a person declares himself unable to repay his debts and either develops a three- or five-year repayment plan or receives a debt discharge from a bankruptcy court. Both of these events have major impact on a person's credit report.

FICO Score Impact

FICO scores are numbers that rate an individual's creditworthiness. These numbers, which derive from the information on a person's credit report, range from 300 to 850, with higher scores representing good credit. Bankruptcy and foreclosure both drastically lower credit scores. A foreclosure can drop a person's FICO score by 250 to 280 points, while bankruptcy subtracts 160 to 220 points from a person's credit score. These point drops are significant enough to drive almost anyone's credit into the "bad," or below 620, category.

Time Frame

In addition to the large numerical impact of bankruptcy and foreclosure on credit scores, these occurrences remain on individuals' credit reports for long periods of time. Bankruptcy stays on a person's credit report for either seven or 10 years, depending on the type of bankruptcy the individual files. Foreclosure takes up space on a credit report for seven years. Fortunately, a person's credit will improve as more time elapses after foreclosure or bankruptcy.

Insurance Denials and Higher Rates

The effect of a bankruptcy or a foreclosure on a credit score could potentially harm someone's ability to obtain automotive insurance at reasonable rates. According to the Electronic Privacy Information Center, many car insurance companies believe those with black marks on their credit reports or low FICO scores are higher insurance risks and may raise their insurance rates or deny them coverage outright.

Career and Housing Impacts

Foreclosure and bankruptcy and/or the credit score damage they cause can prevent someone from renting an apartment or getting a job. This is because many landlords and employers believe that these occurrences stem from an individual's irresponsible financial and life practices, whether or not that is actually the case. According to MSN Money, a consumer finance website, recent bankruptcies may also disqualify individuals from certain types of federal or state government jobs that affect national security.