How Does Bankruptcy Affect Your Credit Score?

By | November 1, 2018

While filing for bankruptcy may be the most feasible way out if you’re unable to service your debt, it could have a huge impact on your Credit Score. We’ll tell you all about it here!

How Does Bankruptcy Affect Your Credit Score?

We know that the amount of debt you have accumulated and your payment record are two of the biggest factors that affect your Credit Score. However, there’s another factor that can pull your Credit Score down considerably, and that’s bankruptcy.

Filing for bankruptcy can be an emotionally difficult decision, but sometimes it can be the best solution to your festering financial worries. Unfortunately, it doesn’t spell good news for your Credit Score.

In this article, we’ll tell you how bankruptcy can have an impact on your Credit Score and the methods you can employ to rebuild your credit reputation post-bankruptcy.

When you declare bankruptcy, you’re making a legal statement that you are unable to service your loan obligations to your creditors. It could happen if, for example, your business has suffered huge losses, or if there’s been a sudden loss of job or an accident that has left you paralysed or handicapped.

Here are some of the ways in which filing for bankruptcy can affect your Credit Score:

  1. Bankruptcy can make your Credit Score nosedive: Filing for bankruptcy can have far-reaching consequences for your Credit Score. According to major scoring model FICO, when a person with a Credit Score of 680 files for bankruptcy, he could lose anywhere between 130 and 150 points, while a person with a Credit Score of 780 would lose anywhere between 220 and 240 points. If you already have a low Credit Score, filing for bankruptcy could completely cripple it.
  1. Bankruptcy remains on your Credit Report for a long time: Bankruptcy remains on your Credit Report for up to 10 years. This could certainly hamper your chances of securing further credit. Remember, the higher your Credit Score, the further it could fall. You stand to lose more points after filing for bankruptcy compared to someone with a lower Credit Score filing for the same. Out of all the scenarios, filing for bankruptcy can hurt your Credit Score the most since it affects several credit accounts and reflects negatively on your payment history. 
  1. Bankruptcy’s negative effect on your card diminishes with time: Although, after filing for bankruptcy, it will take considerable time for you to regain your credit standing since the bankruptcy information stays in your Credit Report for a decade, its impact on your score, however, diminishes with time. In fact, your score might start to improve shortly after bankruptcy hits your report. This is because, technically, you no longer owe the debts that have been discharged. This could help your Credit Utilisation Ratio (the amount of debts you’re carrying versus your total credit limits). 

Additional Reading: 7 Shockingly Simple Reasons Your Credit Score Isn’t Improving

Ways to rebuild your Credit Score after bankruptcy:

Filing for bankruptcy is not the end of the road. In fact, it offers you the opportunity to start afresh and manage your finances better. Here’s what you can do to rebuild your credit standing:

  1. Check that bankruptcy was declared correctly: Pull your free Credit Report to check that all debts that were part of the bankruptcy filing are marked as discharged and with a zero balance.
  1. Get a starter line of credit: Start with a new line of credit, like a secured Credit Card, that is given against a Fixed Deposit. The credit limit for this card is a certain percentage of the amount that you have earmarked as Fixed Deposit. Remember, however, to make on-time payments on this card and spend regularly, but within your credit limit. This will largely improve your Credit Score. ICICI Bank and Axis Bank are some banks that offer this type of Credit Card in India.
  1. Make timely repayments and stay within your credit limits: Payment history accounts for 35% of your Credit Score. Give standing instructions to your bank to make payments on your behalf so that you never default on a payment. Remember to stay well within your credit limits and keep your spending in check if you have to.
  1. Don’t close your lines of credit: It might seem like the most rational thing to do after bankruptcy, but resist the urge to close all your credit lines. Closing a Credit Card account will further pull down your Credit Score. If you’re wary of overspending on a particular Credit Card, opt for a card with a low annual fee and keep the credit line open for a better Credit Score.

Additional Reading: 11 Extremely Useful Tips To Help Your Business Sail Through A Financial Crisis

Having bankruptcy feature in your credit profile will determine your ability to access credit for a substantial part of your future. Try to discharge your bankruptcy actions as soon as possible. Remember to check your report after the 10 year mark to see that there is no mention of the bankruptcy or any item related to it in the said report.

To avoid falling into the downward spiral of bankruptcy again, remember to follow some of the tips shared above.

Not sure what your credit standing looks like? Click on the button below to check your FREE Credit Score.

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