What Is a Bankruptcy Score and How Does It Affect You?

While there is no distinct “bankruptcy score” like FICO or VantageScore, bankruptcy significantly impacts an individual’s existing credit scores. Lenders use various financial indicators to assess the likelihood of future bankruptcy, sometimes called a bankruptcy risk score. This predictive measure differs from a traditional credit score, which primarily evaluates an individual’s ability to repay borrowed money.

Understanding Bankruptcy’s Impact on Credit Scores

A bankruptcy filing causes an immediate and substantial drop in an individual’s credit scores. For example, a high credit score could drop by 200 to 240 points, while a lower score might see a reduction of 130 to 150 points. This decrease reflects a legal declaration that an individual cannot repay their debts as initially agreed. Lenders view bankruptcy as a major risk indicator, signaling a troubled payment history and a higher potential for future default.

The presence of bankruptcy on a credit report severely lowers conventional credit scores, making it considerably more challenging to obtain new credit. The impact on credit scores can be more pronounced for those who had a strong credit history prior to filing, as it represents a stark reversal from a pattern of responsible financial behavior.

Factors Influencing Credit After Bankruptcy

A bankruptcy filing becomes a public record entry on an individual’s credit report. Credit reporting agencies must accurately reflect this status, ensuring discharged debts are listed with a zero balance and marked as “included in bankruptcy” or “discharged.”

The type of bankruptcy filed also influences its appearance on a credit report and lender perception. Chapter 7 bankruptcy, which involves the liquidation of non-exempt assets, often results in a more immediate and severe impact on credit scores. Chapter 13 bankruptcy involves a court-approved repayment plan over several years. Some lenders may view Chapter 13 more favorably due to the commitment to repaying debts, even though both types of bankruptcy significantly affect credit scores.

Duration of Bankruptcy on Credit Report

The duration a bankruptcy filing remains on an individual’s credit report depends on the type of bankruptcy. A Chapter 7 bankruptcy typically stays on a credit report for up to 10 years from the filing date. This longer reporting period is due to Chapter 7 involving the discharge of most unsecured debts.

A Chapter 13 bankruptcy generally remains on a credit report for up to 7 years from its filing date. This shorter duration reflects the repayment plan component of Chapter 13, where debtors commit to repaying a portion of their debts over a period, often three to five years. While the bankruptcy record persists, its negative influence on credit scores tends to lessen over time, especially with responsible financial behavior.

Strategies for Credit Rebuilding

Rebuilding credit after bankruptcy requires consistent effort and responsible financial habits. A crucial initial step involves obtaining copies of credit reports from the three major credit bureaus—Equifax, Experian, and TransUnion—to review them for accuracy. Ensuring that all debts discharged in bankruptcy are correctly reported with a zero balance and noted as included in bankruptcy is essential. Any inaccuracies found should be disputed with the credit reporting agencies.

Secured credit cards are often one of the first tools individuals use to establish new credit. These cards require a cash deposit, which typically serves as the credit limit. Using a secured card responsibly by making small purchases and paying the balance in full and on time each month can help build a positive payment history, which is a major component of credit scoring models. Many secured cards report payment activity to all three credit bureaus, aiding in credit score improvement.

Another effective strategy is to consider a credit-builder loan, designed specifically to help individuals establish or improve their credit. With this type of loan, the funds are held by the lender in a savings account while the borrower makes regular payments over a set period, usually six to 24 months. These on-time payments are reported to credit bureaus, and once the loan is fully repaid, the funds are released to the borrower.

Maintaining low credit utilization is also important for credit recovery. This means keeping credit card balances well below their limits, ideally under 30% of the available credit. Consistently making all payments on time, including those for new credit accounts, utilities, and rent, is paramount, as payment history is the most influential factor in credit scoring. Some individuals also find success by becoming an authorized user on a trusted family member’s credit card, benefiting from their positive payment history, provided the card issuer reports authorized user activity.