How Bankruptcy Affects Your Credit Score and Report

Exasperated woman looking at computer monitor with credit card in her hand
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When people file a bankruptcy case, two questions loom large. The first one is, “How much will it cost me to file bankruptcy?” The second one is, “Will I ever get credit again.”

Let’s talk right now about getting credit after bankruptcy. Filing bankruptcy is not the end of the world. If you want credit, you will get it. In fact, you will probably get credit offers while you are in a bankruptcy case or shortly after you complete one.

Yes, you read that right. There are creditors just chomping at the bit to open credit accounts for you. To learn why, read on. But first, let’s talk some basics.

The Difference Between a Credit Report and a Credit Score

All creditors keep records of when you make your payment and the amount of the payment. Some creditors report that information to a central record keeping agency called a credit bureau. In addition to the amount and whether the payment was made on time, creditors also report when the account is opened and closed, the amount of the credit limit and the balance.

The three main credit bureaus are Transunion, Experian, and Equifax. Some creditors report to all three, some to just one or two. Some creditors do not report at all. For instance, almost all mortgages, car loans, student loans and credit cards will report, but very few doctors or hospitals will.

When you apply for credit, your potential lender will “pull” your report from one, two or all three of the major credit bureaus to review your payment history in an attempt to predict how you will pay the account for which you have applied.

A credit score goes a step further. It uses the information in your credit reports to calculate a score. Instead of being forced to sift through all of the bits and pieces of information the credit bureaus have gathered on you, the lender needs only to look at one score to make a lending decision.

What the Credit Score Number Means

Credit scores for most companies range from a high of 850 down to a low of 350.

CategoryRange
Excellent750-850
Good700-749
Fair650-699
Poor550-649
Bad350-540

Who Calculates the Credit Score

Various companies use your credit information to calculate a credit score. One of the first and most popular is called the FICO score from a company called Fair Isaac. Another popular score is called the VantageScore.

How Your Score is Calculated

Each company has developed its own scoring system. Each takes into account many factors but weighs each factor differently. For instance, one scoring system may give a bankruptcy filing greater weight than another company. The second company may give greater weight to the amount of balances compared to the credit limit on select credit cards. The Fair Isaac company provides a rundown of the types of information it includes, but the actual calculation is a well-guarded secret.

Where You Can Find Your Score

You can get your credit score from more sources than ever before. Some will cost you money, but others will provide the score for free or as a premium for signing up for something else, like credit monitoring.

Purchase your FICO scores for all three credit bureaus directly from the Fair Isaac company on its website for about $60. You can purchase the score through any of the three major credit bureaus.

When you subscribe to certain credit monitoring services, the company will provide you your credit score as a bonus. Many banks and credit card issuers, like Wells Fargo, will provide your credit score periodically as a feature. And, now, budgeting applications, like Mint.com, will also provide your credit score, but you have to sign up and set up the app to get this benefit.

Can Filing Bankruptcy Improve Your Credit Score?

If you’ve had trouble keeping up with your bills, you can expect that your credit score has taken a hit because of it. A lot of people believe that filing a bankruptcy case can actually improve your credit score. That kind of misinformation is all over the Internet.

Unfortunately, it is a myth.

You may have a low credit score from late and missed payments or large balances or too many charge cards.

A bankruptcy is a big hit regardless of the credit score calculation. But if you’re already scraping the bottom of the barrel, it could be said that bankruptcy does cause your score to go down much, but it will not make it go up.

What may be true, however, is how quickly you score can recover as compared to filing no bankruptcy at all when you start off with a low score. Pursuant to federal law, negative information stays on your credit report no longer than seven years, except that a bankruptcy can appear on your report for up to 10 years. Therefore, those late payments will drop off seven years after their delinquency. If those accounts are not being paid as agreed, you will continue to rack up negative line items on your report. 

You can rehab your report and your score by ensuring that your accounts are paid according to their terms and by closing accounts, but it is more difficult to change the present status of accounts in relation to your overall credit available.

When you file a bankruptcy case, the negative information from your report, like skipped or slow payments, do not go away. They stay visible because they were presumably correct at the time that the time they were reported, That will not change. What does change is the status of the account — whether it is an ongoing account requiring regular payments and/or whether it can be paid off and closed. The old accounts and the old information will continue to affect your credit score for some period of time, but as time passes, the impact of the negative items will be reduced.

How Long It Takes to Bring Your Score Up After Bankruptcy

How long it takes to bring your credit score back up after bankruptcy depends on a number of factors, including where you started, whether you reaffirmed any debt so that it would survive the bankruptcy, the kinds and amount of debt you incur after your case is discharged, and whether you have paid those debts timely.

In general, however, if you pay your credit accounts on time after your discharge, it takes about two years for you to be offered the best interest rates. That doesn’t mean it takes two years to get credit. You will receive credit offers shortly after and perhaps even during your bankruptcy case. Those creditors specialize in lending to recently discharged bankruptcy debtors. As you can imagine, however, the interest rates can be high as well as other terms, like annual fees, setup fees, and administrative fees.

It's a good idea to wait about six months after your discharge to pull copies of your credit reports. For all of the discharged debts, each item should state “Included in Bankruptcy.” If the debt is not designated that way, the debt will continue to be treated as a negative item rather than as a part of the bankruptcy. This can artificially lower your credit score. Once a year you can get your credit reports for free at AnnualCreditReport.com.

How to Dispute an Incorrect Report

If an entry on the credit report is incorrect or does not indicate that it was included in bankruptcy, you can take advantage of the credit bureau’s dispute procedure, which can be accomplished online or by mail. When you dispute a debt, it will now show on your credit report while the credit bureau is verifying the debt. The credit bureau has 30 days, generally, to verify the debt. If it cannot verify, the debt must be removed from the report.

Can a Credit Repair Company Help After Bankruptcy?

These companies cannot have true and correct information removed from your credit report. At best, they will dispute negative information to have it removed temporarily. Once the credit bureau verifies the information, it will reappear and have to be disputed again. Credit repair companies make their money by charging monthly subscription fees. As long as you pay the monthly fee, they will monitor your credit reports and dispute negative information. As soon as you stop paying, those items will likely show up on your reports again.