How a Bankruptcy Will Impact Your Credit Score
One of the most commonly asked questions when it comes to filing bankruptcy is, “How will this impact my credit score?”
People are understandably worried about their creditworthiness. After all, there are so many vital aspects of your life that are reliant on your ability to open lines of credit. From your home to your vehicle to credit cards and other loans, a poor credit score can be quite harmful, including the potential need to complete rebuild credit. It can even have an impact on your ability to get a job if your potential employer decides to run a credit check on you and views a bad score as an indicator of poor money management skills that would disqualify you from getting the position.
And we won’t sugarcoat it—filing bankruptcy is probably going to leave a big black mark on your credit report. But before we go into that, you should understand exactly what your credit score is.
What is a credit score?
A credit score is a tool that is relied upon by lenders to judge their level of risk in lending you money. The score is based on your financial history, with things like missed payments adversely affecting your score, and things like paying off your credit cards every month helping your score. Lenders want to know whether or not they can reasonably expect you to pay back any money they loan you, and they come to that conclusion based on your credit report. There are three main credit reporting bureaus in the US that track your creditworthiness, and your score may range from anywhere between 350 and 850.
Bankruptcy’s impact on your credit rating
As previously mentioned, filing bankruptcy is usually not going to be a positive thing for your creditworthiness, but it is not always as cut and dry as “ filing bankruptcy equals bad score.”
The degree to which a bankruptcy will impact your credit score will first depend on the type of bankruptcy you file for. For individuals, you will either be filing for Chapter 7 or Chapter 13 bankruptcy. The current state of your creditworthiness when you file for bankruptcy will also be a major factor in determining how much your score is affected.
Generally speaking, the better your credit score at the time of your bankruptcy, the bigger drop you will likely see. Most people can expect their score to decrease by a minimum of 100 points, with the potential for the decrease to be much greater than that. This kind of reduction in your score has the potential to devastate your ability to get future loans. However, there are some types of lenders—like auto lenders—that see your bankruptcy filing as an opportunity to loan you money with minor risk on their part since they know you will not be able to file for bankruptcy again for a significant amount of time.
Thus, filing bankruptcy will not necessarily disqualify you from all types of loans, despite its impact on your credit, and you will usually be able to qualify for all types of loans within just a few years after your bankruptcy. In some rare instances, when one’s credit is in truly dire straits, a bankruptcy could even serve to improve your score a bit.
Nonetheless, you can almost always expect that filing bankruptcy will be ruinous for your credit score. But it is important to remember that most of the time this is a necessary evil. If you are considering bankruptcy, your financial situation is serious, and you likely have bigger things to worry about than your creditworthiness. Filing for bankruptcy will allow you to begin the process of reestablishing your credit score and will also provide you with protection from harassing collection agencies.
Additionally, you should keep in mind that a business bankruptcy will not necessarily harm your personal credit score if you are not considered to be personally liable for your business debts.
If you as an individual or business owner are struggling financially and you believe a bankruptcy could help, please contact Maxwell Dunn Law today to learn about your options.