Of all the things you can do to your credit, bankruptcy carries the single greatest negative impact because each account, marked derogatory by the bankruptcy, could drop your score along with the public record of the bankruptcy itself. Meaning, by the time many debtors file bankruptcy, they’ve usually already missed numerous credit payments and may already have judgments against them. Then, filing for bankruptcy will result in a public record which can harm your score even further once it’s recorded by the credit bureaus.
Credit Score Components
One of the reasons bankruptcy has such a negative effect on a credit score is due to the way that scores are structured. Of the most influential components of a credit score are your payment history and credit usage which collectively accounts for 61% of your Experian PLUS score. Bankruptcy may raise a red flag about your payment history and show that you can’t manage your credit usage. Additionally, bankruptcy hurts another section of your score due to the fact that it’s a public record, and as soon as one is recorded, your score will likely be penalized.
Since bankruptcy has such a negative effect on a credit score, when it falls off, your score may change. Unfortunately, you may have to pay the price of time. A Chapter 13 bankruptcy, in which you pay back at least some of your debt, stays on your report for seven years. A Chapter 7 bankruptcy, which typically results in no payment to creditors, stays for a full 10 years.
Your score may also improve over the years as your delinquent accounts fall off your report, which usually happens seven years after the first reported date of delinquency. With a good payment history, you may see your score recover over time.
Rebuilding after Bankruptcy
Although your bankruptcy will likely have a negative impact on your credit score, you can begin bankruptcy recovery immediately. After your discharge, you may be free of debts that caused you constant late payments. With your remaining obligations, and any new credit that you may be able to eventually take on, keeping your payment history timely will be taken into account. No matter what you do, you’ll have to wait the full seven to ten years before your bankruptcy will actually drop off your report.
Monitoring Your Credit
Monitoring your credit allows you to keep up with changes to your credit report and to stay educated about what’s contained in your credit report. You might say that your credit awareness can increase along with your financial literacy. Monitoring your credit is a way to become more aware of your financial actions, from applying for a new credit card to paying down credit card debt.
This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.
Published by permission from ConsumerInfo.com, Inc., an Experian company. © 2014 ConsumerInfo.com, Inc. All