How Does Bankruptcy Affect Your Credit Score?

Filing for bankruptcy is a significant financial event. The impact on your credit score will depend on several factors, including the type of bankruptcy you file for, your credit history before filing, and how you handle your finances after bankruptcy.

At Lewis & Van Sickle, LLC, located in Green Bay Wisconsin, we aim to help individuals who are struggling financially better understand the bankruptcy process and determine the optimal steps to take based on their specific circumstances.

Below, we’ll provide more context on how you can expect bankruptcy to impact your credit score.

Decreased Credit Score

Your credit score is a three-digit number that reflects your creditworthiness. It’s used by lenders, creditors, and financial institutions to determine your risk level as a borrower. Your credit score is affected by factors such as payment history, amounts owed, length of credit history, new credit inquiries, and types of credit used.

When you file for bankruptcy, your credit score will likely drop significantly. In many cases, individuals see a drop of 100 to 200 points or more, depending on their pre-bankruptcy credit score and other factors. If you had a good or excellent credit score prior to filing, you may see a more substantial decline.

The reason for this significant drop is credit reporting agencies see bankruptcy as a red flag. It indicates that you were unable to repay your debts, which reflects poorly on your financial responsibility. This is why it’s important to fully understand how bankruptcy will impact your credit before deciding whether to move forward with the process.

The Length of Time Bankruptcy Remains on Your Credit Report

One of the most significant long-term effects of bankruptcy on your credit score is how long it stays on your credit report. Bankruptcy can remain on your credit report for seven to 10 years, depending on the type of bankruptcy you file.

• Chapter 7 bankruptcy: This bankruptcy will remain on your credit report for 10 years from the filing date.

• Chapter 13 bankruptcy: This type of bankruptcy stays on your credit report for seven years from the filing date, since it involves a repayment plan and not the complete discharge of debt.

During this time, potential lenders, landlords, and employers may see the bankruptcy when they pull your credit report. This could affect your ability to obtain new credit, rent an apartment, or even secure a job in certain industries.

However, the impact of the bankruptcy on your credit score will diminish over time, especially if you take steps to rebuild your credit after the bankruptcy is discharged. While it may remain on your report for many years, your score can improve with responsible financial behavior.

Impact on Your Credit Utilization Ratio

One of the factors that affects your credit score is your credit utilization ratio, which is the percentage of your available credit that you’re using. After filing for bankruptcy, your credit utilization ratio may be affected, depending on how much of your debt is discharged and how much credit you still have available.

If your credit cards and loans are discharged in bankruptcy, you may lose access to a significant portion of your available credit. This can cause your credit utilization ratio to spike, which can hurt your credit score further. A higher credit utilization ratio is considered a risk factor by credit scoring models, as it suggests that you may be relying too much on borrowed money.

Challenges With Securing New Credit

As mentioned earlier, one of the most immediate impacts of bankruptcy is the difficulty you may face when trying to obtain new credit. Most lenders will be cautious about extending credit to someone who has filed for bankruptcy, as it suggests a higher risk of non-repayment.

However, it’s not impossible to secure new credit after bankruptcy. Many financial institutions offer subprime credit cards and secured loans to individuals with a bankruptcy history. These products are designed to help you rebuild your credit score over time. If you’re able to use these credit options responsibly, you can slowly improve your credit score.

How Long Does Bankruptcy Affect Your Credit Score?

While bankruptcy can cause a significant drop in your credit score, the impact is not permanent. In fact, the negative effects of bankruptcy tend to lessen over time, especially if you take proactive steps to rebuild your credit. Here’s what you need to know about how long bankruptcy will affect your credit:

• Immediate impact: Your credit score will likely experience a substantial drop immediately after you file for bankruptcy. The effect will be most noticeable in the first six months to one year.

• Medium-term impact: Over the next one to three years, the impact of bankruptcy on your credit score will begin to lessen as long as you make sound financial decisions. By consistently paying bills on time and avoiding further debt accumulation, you can gradually improve your score.

• Long-term impact: After three to five years, you should start to see a significant recovery in your credit score. While the bankruptcy will remain on your credit report for seven to 10 years, the impact on your score will be less significant as you rebuild your financial history.

Steps to Rebuild Your Credit After Bankruptcy

While bankruptcy can significantly impact your credit score, the good news is that you can begin rebuilding your credit as soon as your bankruptcy case is discharged. Here are some steps you can take to improve your credit score after bankruptcy:

Pay All Your Bills on Time

According to myFICO, your payment history accounts for 35% of your credit score, making it one of the most critical factors in rebuilding your credit. Even after bankruptcy, it’s essential to make sure you pay all bills—including utilities, rent, and any remaining debts—on time. Timely payments will help demonstrate your reliability and improve your score over time.

Apply for a Secured Credit Card

A secured credit card requires a deposit, which serves as your credit limit. By using a secured card responsibly, you can build a positive credit history that will be reported to the credit bureaus. Make small purchases and pay off the balance in full each month to avoid interest charges and help raise your credit score.

Monitor Your Credit Report

It’s important to regularly check your credit report for errors, especially after bankruptcy. Make sure that all discharged debts are marked correctly and that no erroneous accounts are affecting your score. You’re entitled to a free credit report from each of the three major credit bureaus once per year, so take advantage of this opportunity to stay on top of your credit situation.

Limit New Credit Applications

Each time you apply for new credit, a “hard inquiry” is made on your credit report, which can cause a slight dip in your credit score. After bankruptcy, it’s a good idea to limit new credit applications, as multiple inquiries can have a more significant negative impact on your score. Focus on rebuilding with the credit you already have available.

Maintain a Low Credit Utilization Ratio

Once you begin using credit again, it’s important to keep your credit utilization ratio as low as possible. Aim for a ratio under 30%, meaning you’re using no more than 30% of your available credit. Keeping your credit utilization low shows that you’re using credit responsibly, which can improve your credit score.

Contact Us for Assistance With the Bankruptcy Process

If you're considering bankruptcy and have concerns about its impact on your credit score, Lewis & Van Sickle, LLC can help you understand the process and make informed decisions about your financial future.

Based in, Green Bay, Wisconsin, and serving Oconto, Shawano, Kewaunee, and Sturgeon Bay, we’re here to be your dependable allies throughout the bankruptcy process. Contact us today for more information about our legal services.