How Does Bankruptcy Affect My Credit Score?
Generally speaking, most people try to protect their credit score. Having a decent credit score allows you to finance a home, a car – any expense you cannot afford to pay for all up front. But what if you are considering bankruptcy? How will bankruptcy affect your credit score?
Bankruptcy May Positively or Negatively Impact Your Credit Score
Everyone assumes that filing bankruptcy is a death knell to one’s credit score. That is rarely the case. Consider the following examples:
Example: Bob Smith
Bob Smith lost his job about six months ago. He is in an industry where he knows it is going to take 4 – 6 months to find another decent paying job. He has been trying as hard he can to find another one – he just can’t. As a result, all of his medical bills have gone into collections, his credit cards are behind and he even lost a car to repossession. About 30 different bill collectors call Bob everyday demanding payment. Bob is now getting sued in Court. Bob’s credit is probably sitting right around 450 or so. Bob has gone to numerous banks to try to get a car loan so he can get transportation so he can get a job. The banks won’t touch Bob because of his credit score.
Bob files bankruptcy.
After Bob’s bankruptcy is over, Bob’s creditors are now forced to report “Discharged in Chapter 7 Bankruptcy” on his credit report. Now, when Bob goes to get that bank loan, the bank knows that all of the bad debts that used to be on Bob’s credit are now gone. The bank knows that those creditors cannot collect on those old debts – that makes the bank feel more optimistic about actually receiving their monthly payments from Bob going forward. Moreover, the bank knows that Bob cannot file another bankruptcy for quite some time (up to 8 years in some instances).
As far as Bob’s credit score goes, bankruptcy generally affects your score like this:
If you have really good credit, like an 850, your score will likely come down 100 – 150 points.
If you have an average score, like a 650, your score will likely fluctuate up or down by about 50 – 100 points.
However, if you have a poor score, like Bob’s 450, your score will likely increase by 75 – 150 points just because you are almost immediately eliminating all of that ongoing negative reporting to your credit.
Example: Robert Smythe
Robert has had a great job for 15 years. He has a perfect 850 credit score. However, Robert just found out that after 15 years, he is being let go with no notice. Robert is also in an industry where he knows it is going to take 4 – 6 months to find another decent paying job. Robert does not have the savings to service all of his debt during that 4 – 6 months. He knows, as a certainty, that bills will not get paid and his credit will begin to suffer.
While Robert is not currently behind on anything, he knows its coming. He bites the bullet and files bankruptcy.
Robert has avoided the inevitable negative reporting to his credit. He has avoided the phone calls, the collections letter, the lawsuits and being turned away by potential lenders. Yes, Robert’s credit score of 850 has fallen to around a 700. However, had Robert not acted when he did, all of those creditors would have started negatively reporting. Robert’s score would have gone from an 850, down to a 750, down to a 650 – and, before you know it – Robert and Bob would have been right there together sitting at a 450.
The bottom line is that filing bankruptcy is not the end of your credit. Usually, it’s just the beginning.
Check your credit score for free here and then act now.