How Bankruptcy Affects Your Credit Score in California (and How to Rebuild It)
Your credit score is closely tied to your financial future and will dictate how easy it is to open new lines of credit and buy a house. It also determines the kind of interest rates you’re offered. Paying bills on time and using less of your available credit will improve your score, while opening new lines of credit and missing payments will reduce it.
Filing for bankruptcy has one of the biggest effects on your credit score, and is one of the main concerns we hear from clients preparing for bankruptcy. But while your score will take an initial hit, getting back on track may not be as difficult as you think.
How Bankruptcy Impacts Your Credit Score Initially
Filing for bankruptcy will reduce your credit score by 100 to 200 points on average. The higher your score is initially, the greater the drop will be. There is no fixed points loss, nor is there a single credit score provider:
- FICO Score: Runs from 300 to 850 points and is used by over 90% of lenders, including most major lenders.
- VantageScore: Also covers a 350-850 range, and is more commonly used in consumer apps.
Although it may not sound like much, 200 points can have a massive impact on your credit score. For example, a FICO score of 770 puts you in the “Very Good” range. Filing for bankruptcy could knock 200 points off that score, dropping it to 570, and leaving you in the upper end of the “Poor” range.
In the eyes of prospective lenders, you’ve moved from a dependable applicant to a risky one.
Chapter 7 vs. Chapter 13: Differences in Credit Impact
Both Chapter 7 and Chapter 13 can severely impact your credit score, but long-term prognoses vary.
Chapter 7 stays for up to 10 years and typically causes a steeper drop. At the same time, however, it wipes the slate clean and could improve your credit report in other areas.
Chapter 13 generally stays for up to 7 years, but if you fail to meet your payment obligations, the impact could linger for many more years.
Common Myths About Bankruptcy and Credit Damage
One of the biggest misconceptions about bankruptcy and your credit report is that filing destroys your credit forever. In actual fact, it could improve your situation long-term by making your debts more manageable. If you’ve spent years juggling debts you can’t afford, maxing out credit cards, and missing payments, bankruptcy could get you back on track.
What Lenders See After a Bankruptcy Filing
Lenders will see your bankruptcy and treat it as a red flag for as long as it remains on your credit report.
They’ll see a debtor who couldn’t meet their obligations, and may deem you to be high-risk as a result. Of course, if you spend several years meeting Chapter 13 payments and being responsible, those risks decrease, and eventually, creditors will see a responsible applicant.
Steps to Start Rebuilding Your Credit Immediately
Rebuilding your credit takes time. There are many things you can do to instantly reduce your credit score, including filing for bankruptcy, but nothing that will instantly increase it to the same degree.
Stay patient, and follow these steps to get back on track:
Check Your Credit Reports
Pull a free credit report from TransUnion, Equifax, and Experian to check that the information on your reports is accurate. You can get free reports from all major credit reporting agencies using sites like AnnualCreditReport.
Check that discharged debts are listed correctly, and if you find any errors, dispute them.
Use Secured Credit Cards
A secured credit card secures a line of credit against an initial deposit. The lender doesn’t take any risks, you can apply with ease, and as lenders report to all major agencies, you can steadily build a positive payment history.
Pay Bills on Time
Build a strong payment history by paying all of your bills on time. Use autopay on utilities, pay credit card bills before they’re due, and don’t let anything run over.
Keep Your Credit Utilization Low
After payment history, credit utilization has the biggest impact on your credit score.
It calculates your total available credit, such as the limits on credit cards, and compares them to your total debt. So, if you have two $5,000 limits and have used $2,000 on one and $3,000 on another, you have 50% credit utilization.
Ideally, you should keep this figure below 10%. Pay off balances that exceed this amount, and if the lender offers a limit increase, accept it, but don’t use it.
Become an Authorized User on a Family Member’s Account
If a family member has a credit card with a positive payment history and low credit utilization, ask if they can add you as an authorized user.
Your credit utilization will drop, and you’ll benefit from a boost in your payment history.
Monitor Your Credit Over Time
Keep a close eye on your credit report. Look for errors, check rising debts, and watch your score improve every month.
Timeline for Credit Recovery After Bankruptcy
Your credit score will drop by an average of 100 to 200 points within the first few months of filing for bankruptcy. After six months or so, you may notice some gradual improvements, especially if you’ve cleared sizeable debts and previously had a high credit utilization score.
After a year or two, your score may gradually approach what it was before filing, but there’s still work to be done. Provided you meet your monthly payments, avoid many new lines of credit, and manage your credit utilization, your score could be stronger than ever after 5 or 6 years.
When You Can Qualify for Loans Again
You can apply for loans and new credit cards long before bankruptcy disappears from your credit report. However, you’ll need to wait for the bankruptcy to be discharged, and you may be refused if you don’t give it enough time.
Lenders want responsible applicants. They want to see that you can and will make payments, and if all they see is a history of missed payments followed by a bankruptcy, it doesn’t paint a great picture.
Stay patient, and wait as long as you can, using that time to steadily improve your payment history and reduce your credit utilization.
Moving Forward: Rebuilding Confidence and Financial Stability
Bankruptcy can be devastating for your credit score, but it doesn’t prevent you from opening new lines of credit in the future. With time, your score will improve, and you could be in a better situation than you were before filing for bankruptcy.
Don’t let the fear of damaging your credit score stop you from filing, as it may be the best solution for your financial situation. For more assistance, contact County Law Center today and schedule a free consultation with an experienced bankruptcy attorney.