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Can Your Credit Score Go Up After A Bankruptcy?

Oct. 27, 2023

The answer may surprise you! In some instances, the answer is Yes. Depending on what your credit score is in the first place, filing for bankruptcy can impact your credit score either positively or negatively.

How Are Credit Scores Calculated?

Before discussing how bankruptcy impacts credit scores, let’s talk about how credit scores are calculated. The short answer is that a credit score is a number that represents the amount of risk a lender might be taking in giving you a loan. Among other factors, each of which has a numerical value, your credit score is based on your payment history, the total amount you owe, the length of your credit history, the types of credit you use, whether it’s new debt, or whether you have applied for multiple credit cards over a short period of time. 

What Happens After Bankruptcy If My Credit Score Is Already Low? 

We have seen clients whose credit score actually went up after bankruptcy or only decreased slightly. How is that possible? Suppose you already have a low credit score. In that case, bankruptcy might raise your credit score because it clears negative items from your credit report and reduces your debt- to- income ratios.

Although the bankruptcy will remain on your credit report for 7 to 10 years, depending on the type of bankruptcy you file, most unsecured debts must be reported as discharged or included in your bankruptcy. So, if you’ve racked up late payments, reporting of delinquent payments, or high balances on your credit report, those will go away. You will eventually be able to rebuild your credit score, although that process doesn’t happen overnight.

One of our clients had a low credit score of 476 when he filed bankruptcy, according to Creditxpert, the software our firm uses. The software can estimate the impact of a bankruptcy on your credit report. For this client, Creditxpert showed that his credit score would go up to 641. That’s an increase of 165 points!

What Happens After Bankruptcy If My Credit Score Is High? 

If you can’t make your debt payments, a high credit score today is possibly a lower credit score down the road. But in answer to the question, yes, bankruptcy has a more negative impact on your credit score if you currently have a high score. In the short term, the impact can be significant. One of our clients had a high credit score of 758  when he filed bankruptcy that, according to Creditxpert, will go down by 83 points to 675. That’s a decrease of 83 points.

However, bankruptcy can have a long-term positive impact on your credit score because once your debts are discharged, you can begin to re-establish credit. If you are facing insurmountable debt, bankruptcy can provide a fresh start. 

How Long Does It Take To Rebuild My Creditworthiness? 

The amount of debt you have and the type of bankruptcy you file for can affect how quickly you can recover from bankruptcy. Keep in mind that while it’s true that new creditors can see that you filed for bankruptcy when they evaluate your creditworthiness, that doesn’t mean you won’t be able to obtain credit in the future. The first few years after a bankruptcy will likely be more challenging to get new credit. You may have to pay higher interest or have lower credit limits. But as you begin to re-establish your credit and create a good payment history, and the bankruptcy ages, some of those challenges will diminish. 

Does The Type of Bankruptcy Have An Impact On My Credit Report?

Yes. The type of bankruptcy you file affects how long a bankruptcy stays in your credit report. However, that is only one of many factors that should be considered when determining what type of bankruptcy to file. Bankruptcy is complex, and working with an experienced bankruptcy lawyer is critical. At BransonLaw, we will assess your personal situation and help you determine the best path to give you a fresh start, considering all the factors involved in the decision, including the impact on your credit score. Our team can pull your credit report and see what the likely impact will be on your credit score. This helps you make an informed decision.

A Chapter 7 Bankruptcy, sometimes called a liquidation bankruptcy, means a court-appointed trustee sells your non-exempt assets. The proceeds from the sale are used to pay creditors, and the rest of the debt is discharged. We can help you determine if your assets are protected under your available exemptions. A Chapter 7 bankruptcy can stay on your credit report for up to 10 years. However, while the bankruptcy itself will remain on your credit report, after filing for bankruptcy, you might be seen as less of a credit risk than before filing since you have fewer outstanding debts. 

Debts that you “reaffirm” will be reported on your credit report after you file bankruptcy. In chapter 7 you can “reaffirm” secured debts like mortgage and vehicles. This means you are reaffirming your obligation, and the debt won’t be discharged, but the creditor will report these payments to your bureau, which will help your credit score. If you pay your mortgage or vehicle loan payments on time, you’ll be rebuilding your credit score. If you don’t reaffirm the debt in a Chapter 7, the creditor likely will not report the payments on your credit report.

Chapter 13 Bankruptcy: This is a reorganization bankruptcy. Instead of selling non-exempt assets, the debtor establishes a repayment plan to pay off all or a portion of their debts over three to five years. A Chapter 13 bankruptcy stays on your credit report for 7 years. Paying your Chapter 13 plan payments on time can help you begin to rebuild your credit score and your  financial health. You can also retain secured debts in a Chapter 13 bankruptcy and continue payment on those debts. After the Chapter 13 plan is completed, the payments will be reported to credit bureaus. Timely payments will help you reestablish your credit.

How Can Filing For Bankruptcy Help My Credit Score Over Time?

Filing for bankruptcy can have positive effects both in the short term and in the long term. Here are some of them:

  • Debt-to-Income Ratio Improvement: Many of your debts may be discharged after bankruptcy. That means you may have no outstanding debt, which reduces your debt-to-income ratio, a factor credit bureau consider when calculating your credit score.

  • Removal of Delinquent/Collection Account Reports: If your credit report contains late payment reports and high credit balances, bankruptcy can help stop those negative items from  being reported in your credit report. After a bankruptcy, those debts can no longer be reported as delinquent and are instead reported as discharged or discharged in bankruptcy. Collection/delinquent accounts negatively impact your credit score, so the sooner this stops, the better.

  • Re-establishing Credit: After filing for bankruptcy, you might be seen as less of a credit risk compared to before since you have fewer outstanding debts. 

How Can I Rebuild My Credit Score After A Bankruptcy? 

Since your debt will have been discharged, you will likely be in a better position to build a history of being financially responsible. Here are several other things that you can do to improve your credit score:

  • Secured Credit Cards: Many people begin receiving offers for secured credit cards within months after a bankruptcy. When you open the account, these cards require a cash deposit, which becomes the credit line. They function similarly to debit cards in that you use your own money instead of borrowing from a creditor. Unlike a debit card, though, your payment history is reported to the major credit reporting agencies.

  • Pay Your Bills On Time: By consistently making the payments on time, every time, you can begin rebuilding your credit history and improving your credit score.

  • Limit New Credit Inquiries: Only apply for new credit, when necessary, as too many applications for more credit can lower your credit score, especially if you apply for many credit cards in a short time frame.

The bottom line is that you can increase your credit score over time if you are patient, consistent, and committed to establishing an outstanding record of paying your debts on time.   

BransonLaw Can Help

Filing for bankruptcy relief when you have insurmountable debt is never an easy decision. Sometimes it’s the right choice for you, though. At BransonLaw, we can assess your personal situation, decide whether bankruptcy makes sense for you, and if so, determine which form of bankruptcy is best for you. Call us today if you are considering bankruptcy. Our team of experienced bankruptcy attorneys is here to guide you through the process of bankruptcy and help you get back on your feet.

We are located in Orlando, Florida, and handle bankruptcy cases around the State of Florida. If you are unable to manage your debt, call us today.