Rebuilding Your Credit After Bankruptcy

One of the most common questions brought up by potential clients considering bankruptcy concerns how the bankruptcy will affect their credit score, for how long, and how the debtor can rebuild. In general, the following is true:
First, everyone’s situation is different, so specific predictions are impossible. Your entire credit profile will come into play in determining how hard your credit score is impacted. For instance, people with a relatively high credit score may suffer a larger drop than someone who already has a low score due to a significant amount of missed payments.

Second, your credit score from the three different credit reporting agencies (TransUnion, Equifax, and Experian) are the result of proprietary formulas/algorithms known only to the credit reporting agencies. These formulas weight you credit information in different ways to arrive at your credit score. One agency might weight more heavily the length of time you have an account open, whereas another agency might put more weight on the ratio of how much you owe versus your credit limit. There are several such factors and how they are weighted is what makes each agency’s score for you unique. For more information on this, see What’s InYour Fico Score.

Third, a bankruptcy will be one of the biggest hits to your credit score. It will reduce your credit score more than a foreclosure, a short-sale of your house, a repossession of a vehicle, and general delinquent debt. The range by which a bankruptcy may reduce your score, in general, might be 100-250 points. The reduction in your credit score will make future borrowing more expensive, at least temporarily, but the discharge of your unsecured debts will likely put you on sounder financial footing.

Fourth, a bankruptcy can remain listed on your credit score for up to ten years. However, over time, the effect of the bankruptcy diminishes. What is most important is what you do after the bankruptcy. You will need to re-establish your credit and show creditors that you are consistent in paying your obligations. For those who have a car payment or mortgage that continues after the bankruptcy, making those payments on time each and every month will build your credit-worthiness. For others, it may mean first obtaining a secured credit card, and then obtaining unsecured lines of credit which are paid off each month. If you can obtain a mix of installment loans and revolving lines of credit, this will often aid in repairing your score. Using these strategies, former clients report that they have re-built their credit scores within one to two years following their discharge and are able to purchase vehicles and even homes.

If you have further questions, contact an attorney for assistance.