What Happens to My Credit if I Declare Bankruptcy?

So far in 2022, almost 700 Pennsylvanians have filed for personal bankruptcy. Widening the view to the entire country, about 26,000 Americans have filed. Most of those people probably wondered how bankruptcy would affect their credit score.

Bankruptcy will undoubtedly affect your credit score. Whether the impact is positive or negative depends on the specifics of your situation. If you are considering filing for personal bankruptcy, ask an experienced attorney at Scaringi Law about how filing could affect you.

Bankruptcy May Boost Your Credit Score

An individual generally files for bankruptcy when they are unable to meet their monthly debt obligations. There are many reasons why this happens: job loss, divorce, medical bills, student loans, credit card debt, and more. There’s usually a combination of factors that contribute to bankruptcy.

The person also tries months – maybe years – to get their finances on track. As they continue to struggle, the hole gets deeper. There are late fees, fines, and creditor threats. They might sell off a family heirloom or other valuables. The toll is more than financial. Physical and mental health can also be impacted.

Late payments and unpaid debts whittle away at your credit score. Yes, a bankruptcy filing will tell the world you are a credit risk. Keep in mind, though, that a low credit score also broadcasts the same.

If your credit score is in the 500s or lower, bankruptcy might boost your score by 50 points or so. Credit score factors such as late payments and credit card utilization will be reset.

What Is a Credit Score?

Credit scores range between 300 and 850. The higher the score, the better the credit. The score is determined by your payment history, your debt, length of your credit history, types of credit, and other factors.

The three largest credit bureaus are Experian, Equifax, and TransUnion. The scores are generally graded as follows:

• 300-600 is a poor credit rating
• 601 to 660 is a fair credit rating
• 661 to 780 is a good credit rating
• 781 to 850 is an excellent credit rating

The better your credit rating, the more likely you will be approved for financial products, from credit cards to home loans. You will also be offered more favorable terms like a lower interest rate.

Improve Your Credit Score Post-Bankruptcy

Once much of your debt has been discharged, you can create a new budget and take steps to improve your score over time.

Ways you can lift your creditworthiness include the following:

• Live within your budget. Evaluate your expenses and income. Determine what services are necessary and what can be eliminated.
• Pay your bills on time. Consistently and reliably paying your bills show you can manage your expenses.
• Open a secured credit card. A secured credit card is opened by a cash security deposit. The amount of the deposit is usually the credit limit. Use this card to make small purchases and pay off the balance each month.

When you open a new account of any kind, ensure that the creditor is reporting your activity to the credit bureaus. Doing so will ensure that you will get credit for all your new and improved financial habits. Your payment faithfulness will positively your credit score. Monitor your credit report. You are entitled to a free credit report annually.

Downsides of Bankruptcy

If your credit score is above 600, a bankruptcy filing can drop your score. The higher your score, the deeper the impact. How long a bankruptcy remains on your credit report depends on the type of filing. A Chapter 7 bankruptcy (discharges/erases most unsecured debt) stays on your report for 10 years, while a Chapter 13 bankruptcy (restructuring of your debt) stays on for 7.

Determine Whether Bankruptcy Is Right for You

Declaring bankruptcy is a decision that demands careful consideration and consultation with an experienced lawyer. Avoiding bankruptcy because of misplaced pride usually only serves to worsen the situation. Get the facts. Understand the advantages and disadvantages. Evaluate all your options. We’re here to help.

Schedule a free initial consultation with Scaringi Law by calling (717) 775-7195 or submitting our online form.