Bankruptcy can impact your credit score more severely than any other single financial event. While not all bankruptcies actually cause a big credit drop (in fact, it is possible your credit score could rise following a bankruptcy), any negative effect makes it more challenging to acquire credit in the future. A bankruptcy also appears on your credit report for years after you file, providing a big warning sign to potential lenders about a troubled payment history. Some creditors immediately deny an application when a bankruptcy is listed on a credit report.
Bankruptcy and Your Credit Rating
Your FICO credit score is often the most important determinant in whether you receive credit, how much and at what interest rate. The higher your credit rating means that you can borrow more and at a lower interest rate. Filing bankruptcy can cause your credit score to drop dramatically. If a lender is willing to accept your credit application, it is likely to be on less favorable terms.
FICO states that your payment history makes up 35% of your total credit score. It is possible that a bankruptcy filing will not cause a major drop if you already have an inconsistent payment history. Another 30% of your score is the total amount of debt that you owe, which bankruptcy discharge can actually help. However, it is rare that a bankruptcy does not damage your credit rating.
Bankruptcy and Your Credit Report
The type of bankruptcy you choose to file will determine how long it is listed on your consumer credit report. Chapter 7 and Chapter 11 bankruptcies stay on your credit report for 10 years after you file. Chapter 13 bankruptcies remain on a credit report for seven years after the bankruptcy is completed, but Chapter 13 proceedings can take up to three to five years to finish.
In many cases, it is not your damaged credit score that makes it hard to obtain credit. Some lenders do not grant credit to anyone with a bankruptcy, regardless of their FICO score. If you are having difficulty obtaining credit following a bankruptcy, it may be a good idea to open up a secured credit card.
Applying for Credit After Bankruptcy
Since it can be difficult to get credit after filing bankruptcy, your personal relationship with a lender can be crucial. Having employees or management at a bank, credit union or auto lender that know, trust and like you makes it easier to get an application accepted.
You rebuild credit after bankruptcy the same way that you build credit before one: with time and a consistent repayment history. If you believe you can continue to repay a pre-existing debt during and after a bankruptcy, consider a reaffirmation agreement with one of your creditors to help the process of rebuilding your credit score.