Does Bankruptcy Affect Your Auto Insurance?

Man resting his chin on his hand counting coins on a counter top, symbolizing bankruptcy.

Getty Images/​Rafael Ben-Ari


In most states, an insurance provider will check your credit and bankruptcy history before writing an auto insurance policy. You may feel that your credit has nothing to do with your driving, but your provider will see this in a different way. Statistics show drivers with bad credit are more likely to file a claim than drivers with a good credit rating and that is why it matters to your insurance provider.

Only four states—California, Hawaii, Massachusetts, and Michigan—do not allow your credit score to be used when determining auto insurance rates. Since bankruptcy can significantly lower your credit score it could mean you will have higher insurance rates—at least until your credit score improves.

How an Insurance Credit Rating Is Determined

You may be surprised to learn that an insurance company does not use the same credit score to determine insurance rates as one a lender would use to approve you for a loan. While a lender looks at your ability to repay a loan, an insurance company is considering something far different.

The insurance credit score looks at the probability of you filing a claim and how expensive that claim will be. The auto insurance score considers the age of your credit history, your available credit, payments history, and the number of accounts that are in good standing.

Credit Ratings and Your Premium

In states where credit ratings are allowed to be used in determining car insurance rates, the difference in premium can be stunning and those with the very worst credit scores can end up paying twice as much for auto insurance as those with an excellent credit score. Not only does your credit score affect your car insurance rate but it may also affect how much money you owe for a down payment when starting your insurance policy.

Insurance companies normally check insurance credit scores once a year, so if you’ve recently declared bankruptcy, you can expect a possible rate increase when your auto insurance renews. The good news is that you likely will not have your auto insurance policy canceled because of bankruptcy even though your rates may go up initially. If you continue to pay your premiums on time and stay accident-free, you could potentially see your rates decline even after you have gone through a bankruptcy.

Removing Bad Credit Scores

Unfortunately, if you fall into financial hardships and have to declare personal bankruptcy, the consequences could remain with you for quite some time. In fact, it may take up to 10 years for a bankruptcy to fall off your credit report. The time will vary depending on the particular type of bankruptcy filing.

There are two types of personal bankruptcy, chapter 7 and chapter 13. A chapter 7 bankruptcy is the worst on your credit score. A chapter 13 filing gives you three to five years of protection from creditors and a chance to retain many of your assets while you pay back creditors.

Rebuilding Your Credit after Bankruptcy

Filing for bankruptcy basically puts you at the bottom of the credit rating ladder. You have to begin to work your way back up again. One way to begin to rebuild your credit is obtaining a secured credit card which some credit card companies make available to people with compromised credit.

A secured credit card is a credit card that is backed by your own security deposit. Limits are often only available in small amounts such as $300; but, if you pay your monthly payments on time, the credit card company does report payments to the credit bureaus and it will help you rebuild your credit score over time. If you are not enrolled in a mandatory court-appointed credit counseling course, it may be a good idea to seek out some free or low-cost credit counseling services such as the National Foundation for Credit Counseling.

The Bottom Line

People who have the best driving records and the best credit scores will get the best auto insurance rates. The good news is, you can improve both your driving record and your credit score. As bankruptcies fall off your credit report and you go without any accidents or tickets, you will be able to get a lower auto insurance rate. 

In the meantime, you may be able to take advantage of other insurance discounts to lower your auto insurance rates such as bundling policies or taking a defensive driving course. Just be patient and keep working hard toward improving your credit!