Will My Credit Score Rise When Bankruptcy Comes Off?
A credit score is a measurement of how much of a risk it is to extend credit to an individual. If you have fallen behind on your bills or have never been extended credit and demonstrated the ability to use it responsibly (such as a credit card that you have paid on time), you will usually have a low credit score.
So it stands to reason, pretty obviously, that if you file bankruptcy, that your credit score will be impacted negatively. Drops of between 100 and 200 points on your credit score are not uncommon, and it is a near certainty that you will have trouble getting new credit lines, whether that be a mortgage or a credit card, in the short term after filing for bankruptcy.
But you may be shocked at how quickly your credit score rises after filing. While a bankruptcy stays on your credit for years after filing, a recent study showed that most people actually had their credit scores go up even before the bankruptcy came off their credit report, and the average credit score increase after filing for bankruptcy was actually pretty dramatic.
Filing for Bankruptcy Typically has an Immediate Negative Impact on Your Credit Score
As we said, it should be no surprise that your credit score will be negatively impacted by a bankruptcy filing. The whole point of a bankruptcy filing is to escape debt, and a credit score is supposed to reflect your ability to handle your debt responsibly.
According to credit.com, most people do see an immediate impact on their FICO score (FICO is one of a few competing credit scores – they are all similar, but issued by different companies). For those with good or better credit scores (700 or higher), a drop of as much as 200 points, if not more, is common. However, those with lower credit scores, such as those below 680, will see drops of between 130 and 150 points. It’s as simple as this: those with lower credit scores have less room to fall.
The Rebound in Your Score After Filing is Often Pretty Immediate and Dramatic
The real shocker is how quickly your credit score can recover. Researchers at the Federal Reserve Bank of Philadelphia analyzed data from Equifax, another one of the credit bureaus with its own version of the credit score, and saw that the average filer for a Chapter 7 bankruptcy had a credit score of 538.2. By the time their debt was discharged and the bankruptcy case was finished, the average score had already gone up to 620.3. For Chapter 13 filers, because their filing requires a 3 to 5 year repayment plan, and because most people don’t complete that payment plan, the data was a little fuzzier. However those who completed their payment plan and got partial discharges of debt saw a similar rise from an average of 535.2 to an average of 610.8.
None of that makes sense, right? These people just filed bankruptcy and had their debt eliminated, and they proved on the public record in a courtroom that they could not handle the debt that had already been extended to them. On the other hand, they have just gone from someone who is far behind on an overwhelming load of debt to someone who has a mostly clean slate.
Of course, someone who has less outstanding debt and no legal obligation to repay older debt that has been eliminated by the court is going to have a better credit score, which again, measures the risk of extending debt to that person. It’s counterintuitive, but if you really think about it, it actually makes sense. Bankruptcy helps these people’s credit scores because most of them were so far behind in debt that they had nowhere to go but up.
You Will Likely See an Additional Credit Score Increase When the Bankruptcy Filing is Removed From Your Credit Report
How long does a bankruptcy filing stay on your credit report? For most people, the answer is 10 years, because most people file a Chapter 7 bankruptcy. A Chapter 13 bankruptcy only stays on your report for seven years.
That’s a long time to wait for your credit score to recover, but as you just read, most people get an immediate boost in their credit score from filing bankruptcy because they started out with a low credit score to begin with. Years later, once their bankruptcy has fallen off their credit report, do they get an additional boost? Assuming they have managed their credit responsibly, they should see some boost, according to WalletHub. Many people report increases of between 30 and 100 points.
Don’t Let Fear of a Bad Credit Score Stop You From Filing
If there is one thing you take away from this article, it should be that filing for bankruptcy itself isn’t a death sentence for your credit score. While most people do see a significant drop in their score after filing, most people also see a massive increase in their score just a few months later when their Chapter 7 filing is completed and their debt is discharged.
Of course, that credit score boost is contingent on your bankruptcy actually wrapping up successfully, which is a great reason to hire a professional to help you get through the process. While it may seem difficult to gather the funds necessary to file for bankruptcy with the help of an attorney, the benefits of knowing that your filing will be done correctly, that as much of your debt will be eliminated as possible, and that your bankruptcy filing will have the best chance of being successful, are all great reasons to speak to an attorney before deciding to suffer through debt or to try filing for bankruptcy on your own.