People who might benefit from personal bankruptcy often delay filing. Those hoping to replace their vehicles or qualify for mortgages may worry that bankruptcy could prevent them from achieving those otherwise reasonable goals.
People struggling financially may fear ruining their credit forever by filing for bankruptcy. Those who understand how bankruptcy affects their credit scores may have an easier time making an informed decision about whether bankruptcy is a viable option.
Credit scores drop after a filing
The credit score of the person who files usually drops by around 200 points when they file. Their open revolving lines of credit usually close immediately. However, they can begin rebuilding shortly after the completion of the bankruptcy process.
As filers develop a history of paying what they owe on time, their credit scores may begin to slowly improve. Frequently, people who successfully complete personal bankruptcy can improve their credit score to where it was prior to their filing or even above their prior score before the record of the bankruptcy comes off their credit report.
Seven years after discharge in a Chapter 13 case and 10 years after the discharge of a Chapter 7 case, the credit bureaus cease reporting the prior bankruptcy. At that point, the bankruptcy no longer diminishes credit opportunities for the filer.
Bankruptcy does cause a significant drop in the credit score of the filer initially. Still, in the long term, bankruptcy may help them achieve a higher credit score, which can make them eligible for more favorable credit terms.
Learning more about how bankruptcy affects the filer can help people understand when bankruptcy might be the best option for them. The credit damage associated with personal bankruptcy is temporary, but the relief of discharge can provide lasting protection.