How does bankruptcy affect your credit?

The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.

Filing for bankruptcy can offer relief from overwhelming debt, but it will likely have severe and long-lasting effects on your credit. Bankruptcy can remain on your credit report for seven to 10 years, and your score may take a significant hit in the immediate aftermath. 

Rebuilding your credit after bankruptcy is possible, but it is often very difficult. Lenders may be hesitant to provide you with loans or credit cards, and taking on high-interest loans or credit cards could land you back in trouble with debt. 

If you’re considering filing for bankruptcy, or you already have, read on to learn how bankruptcy affects your credit, how your credit score could change, how bankruptcy appears on your credit report and what you can do to rebuild credit after filing for bankruptcy. 

What effects does bankruptcy have on your credit?

Bankruptcy is a double-edged sword: on the one hand, you could free yourself from debt you had no possibility of paying back, but on the other hand, you’ve provided a clear signal to creditors that you may never pay back your debts if they lend you money. 

Here are some of the immediate effects that bankruptcy can have on your credit:

• Your credit score may drop: There’s no specific number of points your score will drop as a result of bankruptcy, but your score will almost certainly take a hit.
• Your credit report will list your bankruptcy: Since bankruptcy is a public record item, it will appear on your credit report for seven to 10 years.
• You may not be able to get new credit easily: When you apply for a loan or credit card, lenders can see your credit report—and your bankruptcy may dissuade them from offering credit regardless of your score.

Because bankruptcy comes with serious financial consequences, it’s important to weigh the advantages and disadvantages before proceeding. In most cases, filing for bankruptcy requires legal assistance—so it’s a good idea to contact an attorney and financial advisor to see whether your specific circumstances make bankruptcy a wise choice. 

If you do follow through on filing for bankruptcy and have your debt discharged, make sure you have a clear understanding of how that decision will affect your credit score and credit report for years to come.

Myth: Having debt discharged through bankruptcy offers a complete financial reset.

Truth: In fact, while bankruptcy removes the obligation to pay debt, lasting effects can damage a person’s credit for years. 

How much will your score drop after filing for bankruptcy?

The number of points your score will drop after filing for bankruptcy varies from person to person. Depending on your previous credit history, you could see a modest or a massive drop in your score. The most common scoring model is provided by FICO^®, which has reported that a bankruptcy notation can lead to a score decrease of 240 points.

Here are a few general rules to keep in mind when considering how your score may be affected by bankruptcy:

• A higher starting score could mean a bigger drop: For example, someone with a 780 score could see a drop up to 240 points, whereas someone with a 680 score may only see a drop of around 150 points. 
• Score changes are not permanent: If your credit score drops after a bankruptcy, it can eventually recover with responsible credit usage and time, since your bankruptcy notation falls off your report after seven to 10 years.
• In rare cases, credit scores can increase after bankruptcy: For individuals with especially low credit scores, the debt discharged in bankruptcy could actually lead to a modest increase—though this suggests that significant work will need to take place to rebuild credit. 

Although it’s hard to predict exactly how your score will be affected by anything, there are ways to estimate how your score could be affected by declaring bankruptcy or making other changes to your credit. 

First, find out your current credit score, which is provided for free by many banks and financial apps. 

Second, use the myFICO Score Estimator, which asks a series of 10 questions to determine a rough score range. You can answer some of these questions hypothetically—like saying that you’ve filed for bankruptcy—to see how your score changes. 

Remember: your credit score is not a fixed number. With time and responsible credit usage, it’s often possible to raise your score, enabling you to get access to credit with lower interest rates.

Myth: There’s a specific credit score drop associated with bankruptcy.

Truth: Actually, the number of points a score drops after bankruptcy depends on a variety of factors, like a person’s current credit score and previous negative items.

How does bankruptcy show up on your credit report?

Bankruptcy discharge is part of the public record, and it appears as a negative item on your credit report. As a result, when a lender views your credit report to decide whether to approve an application for credit, your bankruptcy notation will be visible.

That said, the Fair Credit Reporting Act (FCRA) has specific guidelines for how long bankruptcies remain on your credit report. 

• Chapter 7 bankruptcy can stay on your report for up to 10 years from the date you first filed.
• Chapter 13 bankruptcy can stay on your report for up to seven years from the date you file. 

Since Chapter 7 and Chapter 13 function differently, lenders may view the two types of bankruptcy differently when making decisions about new credit. Specifically, while Chapter 7 bankruptcy discharges most debt without payment, Chapter 13 establishes a payment plan, which could be considered more favorable from the perspective of a potential lender.

Regardless of whether you’ve filed for bankruptcy, checking your credit report regularly is a good habit. Everyone is entitled to a free credit report every year from each of the three credit bureaus: Equifax^®, Experian^® and TransUnion^®. 

Occasionally, credit reports include false or misleading information. For example, if you’ve filed for bankruptcy and the associated negative item hasn’t been removed after seven or 10 years, you may need to file a dispute. Oftentimes, getting support from a credit repair company can help with the process of clearing inaccuracies from your credit report.

Looking over your credit report can also give you clues about how to work to rebuild your credit after bankruptcy.

Myth: A bankruptcy remains on your credit report forever since it’s part of the public record.

Truth: While bankruptcy remains an item in the public record, it’s only noted on a credit report for seven to 10 years. 

How can you rebuild your credit?

Even though bankruptcy can take a significant toll on your credit, it is possible to rebuild your credit with time and a few key habits. 

Try to stick to the following strategy when rebuilding your credit after bankruptcy:

1. Set a goal. Figure out what score you’re trying to achieve and why. Do you want to buy a car or a house and get a great interest rate on your loan? Setting a specific goal helps you keep the finish line in sight.
2. Determine what led you to bankruptcy. Find out what habits, circumstances and financial decisions made bankruptcy necessary in the first place. Making incremental changes in those areas of your life will help you along the way.
3. Educate yourself on credit scoring factors. Knowing what leads to a good credit score can help you make better decisions. For example, making on-time payments and keeping your overall credit utilization low can make a big difference.
4. Get new credit—when you’re ready. Rebuilding your credit requires you to use credit, but only when you’re ready. In many cases, a secured credit card (backed by a deposit) is a great first step after bankruptcy.
5. Monitor your progress. Make it a habit to regularly check your credit report and your credit score to see how your new habits are affecting your score.

While rebuilding credit can be difficult, it is important to remember that the damaging effects of bankruptcy and other negative items diminish over time. Consistent and responsible use of credit will start to outweigh the effects of your bankruptcy—and eventually the bankruptcy will leave your credit report entirely.

Whether you’ve already had your bankruptcy discharged or you’re just exploring the possibility, knowing how bankruptcy affects your credit can help you make the right decision for yourself.

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