The most widely-used scoring system utilized by credit reporting agencies is the FICO (Fair Isaac Corporation) credit score. Scores can be up to 850 and are calculated from various credit data contained in your credit report. The data is reported in five categories; each accounts for part of your overall credit score. The effect of bankruptcy depends largely on your entire credit profile prior to filing for bankruptcy protection. You will be required to complete a credit counseling course from a government-approved organization within the six-month period prior to filing for bankruptcy protection.
Effects
A number of factors influence how much your credit score decreases after bankruptcy, including the length of your credit history, your credit score prior to filing and which, if any, debts were kept separate from the bankruptcy. The more credit accounts included in your bankruptcy, the more your score will be impacted. Someone with previously stellar credit may suffer a huge drop in her credit score. Someone who already has several negative marks in his credit history may notice a less significant drop in his credit score.
Chapter 7 Bankruptcy
Chapter 7 is a liquidation bankruptcy -- most, if not all debts get discharged. Generally, a Chapter 7 bankruptcy remains on your credit report for up to 10 years from the filing date. According to MyFICO.com, this only pertains to the Public Records section of your report; the individual credit accounts in the bankruptcy are removed after seven years.
Chapter 13 Bankruptcy
Chapter 13 is a reorganization bankruptcy -- debts get repaid over three to five years. Chapter 13 bankruptcies remain on your report for up to seven years from the filing date. However, they may be less damaging than Chapter 7 bankruptcies to your credit score as long as you do not default on your repayment plan.
Considerations
Some attorneys and financial experts believe that a Chapter 7 bankruptcy can improve a damaged credit score. Your debt-to-income ratio will dramatically improve; your negative payment history will be gone and replaced with "Discharged in Bankruptcy," of which the effects will fade over time; and if you continue to make payments on secured debts not included in the bankruptcy, you are building a positive payment history.
Rebuilding
Normally, your FICO credit score is partially determined by comparing your credit profile to other people in the general population. Following bankruptcy, your credit is compared only to others who have filed bankruptcy so in essence, you may be able to improve your rating faster after bankruptcy. To rebuild your credit profile faster, open credit accounts with major banks, as their approval carries more weight. If some time has passed, ask for an increase of your credit limit to raise your available credit (but do not use the extra credit) and check your free annual credit reports from AnnualCreditReport.com. If your reports have errors, remove them.
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