How Does Filing Bankruptcy Affect Your Credit?

Quick Answer

Declaring bankruptcy means that you can no longer pay your debts as originally agreed. As a result, bankruptcy can have a severely negative impact on your credit score.

A stressed couple working on finances in their home. They are reading documents while sitting on their couch.

Declaring bankruptcy is typically a last resort for people who can't afford to repay their debts. And while it may be the best financial decision in certain circumstances, it's important to carefully consider the negative consequences the move can have on your credit score for several years to come. Here's what you need to know.

How Does Filing Bankruptcy Work?

Bankruptcy is a legal proceeding that offers relief to consumers who are unable to meet their debt obligations. The bankruptcy process is complex, so you'll want to hire an attorney to help you through the process. Depending on your situation, you may file one of two types of bankruptcy: Chapter 7 or Chapter 13.

How Chapter 7 Bankruptcy Works

Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves selling some of your assets—some may be exempt, such as cars and basic household furnishings—to pay off a portion of your debts. The remainder will be eliminated once the bankruptcy is discharged, usually within four to six months.

Chapter 7 bankruptcy is only available to consumers who meet the requirements of a bankruptcy means test.

How Chapter 13 Bankruptcy Works

With Chapter 13 bankruptcy, you can reorganize your debts to make them more affordable. You'll typically get on a three- or five-year repayment plan, during which you'll pay back some or all of what you owe. Once the repayment plan is completed, any remaining debt will be canceled upon discharge.

What Happens to Your Credit When You File for Bankruptcy?

Your payment history is the most influential factor in determining your FICO® Score , and bankruptcy one of the worst things that can happen to your credit. Depending on your situation, a bankruptcy record can knock up to 200 points off your credit score.

That said, the actual impact will depend on the makeup of your credit profile when you file. If you've already missed several payments, experienced a repossession or foreclosure or have one or more debts in collections, your credit score may already be in poor shape. As such, filing for bankruptcy may not do as much additional damage.

In contrast, if your credit score is high and you have minimal negative marks on your credit reports, declaring bankruptcy could have a much greater impact on your score.

If you apply for credit, lenders may not approve your application unless the bankruptcy has been discharged. Even then, you may have a hard time getting approved for certain types of loans. If you do get approved, you may face steep interest rates and other unfavorable terms.

How Long Do Bankruptcies Stay on Your Credit Report?

Chapter 7 bankruptcy will remain on your credit reports for 10 years from the filing date. In contrast, a Chapter 13 bankruptcy, which typically involves paying off more of what you owe, will affect your credit reports and scores for seven years from the filing date.

Regardless of which type of bankruptcy you choose, though, the negative impact can diminish over time, especially if you develop and execute a plan to rebuild your credit.

How to Rebuild Credit After a Bankruptcy

Rebuilding your credit after bankruptcy may seem like an impossible task, but with prompt action, you can establish a good credit score even before the public record falls off your credit reports. Here are a few things you can do to make it happen:

  • Monitor your credit. Check your credit score and credit report frequently to keep track of your progress and address potential issues that could further damage your credit score.
  • Open a secured credit card. A secured credit card works similarly to a traditional credit card but requires an upfront security deposit to get approved. With responsible use—maintaining a low credit utilization rate and paying on time and in full every month—you can improve your credit. As you shop around, consider rewards rates, annual fees, credit check requirements and other features that are important to you.
  • Consider a credit-builder loan. A credit-builder loan is a type of installment loan that disburses your loan proceeds once you complete the repayment plan rather than upfront. In most cases, loan amounts range from $300 to $1,000, and terms range from six to 24 months. Interest rates are generally more affordable than other bad-credit loan options.
  • Get credit for more of your on-time payments. In addition to your debt payments, paying other bills on time can also benefit you. With Experian Boost®ø, you can add certain bills, including rent, utilities, cellphone, insurance and even some streaming service subscriptions, to your Experian credit file. If your on-time payments help your Experian credit score, you'll get the results right away.
  • Stick to a budget. Creating a budget can help you ensure that you live within your means and avoid unnecessary debt that could negate all the work you've done to get your finances back on track. As you set monthly spending goals and track your expenses, you may also be able to start building an emergency fund and working toward other savings goals to provide more stability to your financial plan.

How Soon Will My Credit Score Improve After Bankruptcy?

Declaring bankruptcy is often a result of long-term financial difficulties, so don't expect to recover overnight.

But while improving your credit after bankruptcy requires a lot of time and effort, you could start seeing solid improvement within a couple of years if you're proactive and diligent with the rebuilding process.

Alternatives to Bankruptcy

Although bankruptcy can provide definitive relief from debt, there may be other ways to get the assistance you need without impacting your credit as much. Here are a few alternatives to consider.

Debt Consolidation

If your debt situation is starting to get overwhelming but you're still capable of making payments, a debt consolidation loan could help. With good or excellent credit, you may be able to qualify for a lower interest rate on the new loan than what you're currently paying on your debt.

Alternatively, a good credit score could help you qualify for a balance transfer credit card, which can offer an introductory 0% APR promotion for anywhere from 12 to 21 months.

Debt Management Plan

If your credit score isn't good enough to make debt consolidation worthwhile or your payments on a debt consolidation loan or balance transfer card are still unaffordable, a debt management plan could be worth considering.

With a debt management plan, you can pay off certain unsecured debts over three to five years through a credit counseling agency. Additionally, the agency may negotiate lower interest rates and monthly payments.

That said, you'll typically need to close your credit cards, which can damage your credit, and you'll typically need to pay a modest upfront fee and an ongoing monthly fee throughout your plan's term.

Debt Settlement

Debt settlement involves negotiating with your lenders to pay less than what you owe. You'll typically go through a debt settlement company, but you can choose to negotiate on your own. In both cases, though, you'll typically need to stop making payments while you build up enough savings to pay a lump-sum settlement amount.

Debt settlement can help you save money, but missing payments over several months can have a significant negative impact on your credit—albeit not as severe as bankruptcy.

If you do employ a debt settlement company, note that most will typically charge a hefty fee based on the original debt amount. Some may also charge a monthly fee for the dedicated account you use to build your settlement amount. Finally, there's no guarantee that the creditor will work with you.

Focus on the Long Term

When you need debt relief, it's natural to focus mostly on what bankruptcy, debt settlement or any other alternative can do for you right now. But because each of these options can affect your credit score and financial situation, it's crucial that you take the time to research every course of action and consider both the short- and long-term effects of each.

Before you go through with one of them, consider consulting with a credit counselor or bankruptcy attorney to get objective, expert advice for your situation. Credit counselors generally don't charge for this service, and many bankruptcy attorneys offer free consultations.

Between your own research and expert advice, you'll have a better chance of choosing the best path forward for you.