Bankruptcy is a process undertaken by individuals whose financial situation has dire they no longer have the means to meet their payment obligations to their debtors. Choosing to file for bankruptcy can be a difficult decision, but is usually made as a last resort.
Bankruptcy offers an individual the avenue to have their debts erased as well as legal protection from any future actions of lenders, it does have some negative consequences.
One of the questions people are most concerned about is how a chapter 7 bankruptcy will affect one’s credit score and ability to secure loans in the future. Let us answer the basics of these concerns here.
Understanding Credit Score: Credit scores are one of the primary elements of one’s financial history creditors look at when determining if an individual is likely to pay back a loan or not. Creditors report success, or lack of success, in paying back loans to these credit bureaus. The accumulated activity produces a credit score. Other aspects such as debt utilization ratio, how much of one’s available credit has been used, and debt to income ratio, how much of one’s monthly income is used to service debt, are also key factors.
The most commonly used score is the FICO score. FICO measures people’s credit by awarding them a score between 300 and 850. Payment history and credit utilization are the two largest factors in determining one’s FICO score.
How Much Will Bankruptcy Affect One’s FICO Score: One of the major downsides of declaring Bankruptcy is its effect on one’s FICO score. Is one’s credit score is 700 or above before declaring, the result will likely be a drop in score of about 200 – 250 points. A lower score, such as 550-650 will likely drop by 130-150 points in the event of a bankruptcy.
While Bankruptcy does have a strong negative impact on one’s credit score, once the chapter 7 filing process is complete one can immediately being rebuilding their credit.
Many people find it helpful to seek out the advice of an experienced bankruptcy attorney to gain a good understanding of how bankruptcy will affect their credit score.
How Long Will A Bankruptcy Appear On One’s Credit History: This is another large concern for those who are declaring bankruptcy; they want to know for how long it will appear on their credit history. According to the FICO website, a chapter 7 filing is removed from public record after 10 years. A chapter 13 filing is erased from the public record after 7 years.
Moving Forward After Bankruptcy: Even though the repercussions of a bankruptcy filing are large for one’s credit score they can begin repairing it right away. The best way to begin repairing one’s credit score is by taking out loans and making the required payments on time. Unfortunately, most recently bankrupt individuals will only have access to secured loans. Secured credit cards, where one puts down a deposit equal to the credit limit, are the most common types of credit instruments individuals use to repair their credit. It is also important to maintain one’s credit utilization ratio below 30%. In some cases, people have managed to improve their credit to the 700 and above FICO score range in about 4 years.