Filing for bankruptcy can result in some major changes to an individual’s finances. A filer may feel immediate relief when creditors stop calling them or dismiss pending lawsuits. However, they may also experience certain financial setbacks.
For example, it is common for unsecured revolving lines of credit, like credit cards, to close as soon as someone files for personal bankruptcy. Their credit score may also drop significantly. Even after they complete the bankruptcy process, their credit report will show the bankruptcy for a few years.
Bankruptcy brings down an individual’s credit score
Obviously, bankruptcy is one of the most serious blemishes that can turn up on someone’s credit report. Many people notice that their scores drop by as much as 200 points, sometimes even more, immediately after they file. Bankruptcy can reduce someone’s score to a point where they are ineligible for most lines of credit, at least in the first months after their discharge.
Bankruptcy eliminates other blemishes
Although the bankruptcy itself shows up on someone’s credit report and filing for bankruptcy reduces someone’s credit score, bankruptcy can actually clean up a credit report. The credit bureaus typically remove other blemishes after the discharge of someone’s debt during bankruptcy. Old judgments and past-due account balances no longer show up and do not reduce someone’s credit score anymore. Instead of multiple different credit issues, someone’s credit report should only reflect their bankruptcy discharge.
The discharge is a temporary concern
Credit reporting laws limit how long businesses can report past-due accounts, judgments and other debts. There are also limits to how long the credit bureaus can report someone’s bankruptcy. The type of bankruptcy that someone files determines how long it shows up on their credit report. A Chapter 7 discharge remains on someone’s credit report for 10 years, while a Chapter 13 discharge is only on someone’s credit report for seven years, like any other blemish.
The sooner someone begins rebuilding their credit, the less of an impact the bankruptcy will have on their overall credit score and eligibility for new lines of credit. Understanding how a bankruptcy filing affects someone’s credit report may help people evaluate their options in more informed ways during times of financial difficulty.
