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How do bankruptcies affect your credit score?

Feb. 07, 2021
5 min read
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Editor’s note: This post has been updated with new information.

Before starting on a pursuit to accumulate points and miles, it's important to understand how your credit score is calculated and mistakes you should be careful to avoid. Your credit report follows you around for a long time, and you should only consider opening credit cards if you're able to manage them responsibly.

With every credit card I've opened, I've become even more attentive to paying my bills on time and monitoring my accounts for fraud. However, it's possible that before you found the world of points and miles, you may have made some mistakes such as missed payments, carried a balance, or even had to declare bankruptcy. Today, we're going to take a look at how bankruptcy affects your credit score and what you can do about it.

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The contents of this post are not meant to represent legal or financial advice, and you should consult with a lawyer and/or financial professional before making decisions regarding a bankruptcy filing.

Understanding Personal Bankruptcy

There are two types of bankruptcies an individual can enter into — Chapter 7 or Chapter 13. Chapter 7 is the more traditional of the two, in which all your qualifying debts, such as credit card balances, medical bills, and personal loans, are discharged after three to four months.

As soon as you file, an order called the “automatic stay” stops most creditors from pursuing collection efforts. If you have a high enough income to pay back a certain amount of your debt, you can file for Chapter 13 bankruptcy protection to restructure your debt payments and possibly reduce your debt load as well.

(Photo by shurkin_son/Shutterstock)

Whether you file under Chapter 7 or Chapter 13, you can expect the bankruptcy to stay on your credit report for seven to 10 years and to likely bring down your credit score sharply. However, Credit Karma says that a completed Chapter 13 bankruptcy could be viewed more favorably in the future, as it indicates that you repaid more of your debt.

How Does Bankruptcy Affect Your Credit Score?

You may be wondering how big of a hit your credit score will take if you file for bankruptcy. There's no one-size-fits-all answer here. The exact score impact will depend on a number of personal factors, including the amount of debt discharged during your bankruptcy proceedings and the ratio of positive and negative accounts on your report. However, you can expect to see a drop between 130-200 points on your credit score, according to FICO.

(Image courtesy of scyther5 via Getty Images)

If you file for Chapter 7 bankruptcy, the public record will stay on your credit report for a full 10 years. The good news however is that the following items will fall off your report after seven years:

  • Trade lines that state “account included in bankruptcy”
  • Third-party collection debts, judgments, and tax liens discharged through bankruptcy
  • Chapter 13 public record items

Most people believe that bankruptcy means their financial life is ruined, and while it should only be considered as a last resort, the impact is limited to only 10 years. If you focus on a clean slate of making sound financial decisions, you'll emerge a decade later with a rejuvenated credit score.

After bankruptcy, you can take proper steps to improve your credit by paying your bills on time, not carrying a balance on any open credit cards, and keeping your credit utilization ratio low.

Are you eligible for a credit card after filing for bankruptcy?

(Photo by Hero Images/Getty Images)

A popular misconception about personal bankruptcies is that it's impossible to be approved for a credit card or loan after going through one. Some people after going through bankruptcy will consider secured cards to help them begin the credit recovery process. Secured cards require you to make a cash deposit upfront in exchange for a credit limit. Before applying for new credit products to help build back your credit, you should examine the factors that led you to bankruptcy in the first place and make sure you're not setting yourself up for failure.

Bottom Line

While bankruptcy will negatively impact your credit report initially, with good financial habits over time, you'll start to see an uptick in your credit score. In fact, with consistent on-time payment history, responsible spending, and continual monitoring of your credit report, you'll be on the clear path to rebuilding your credit after bankruptcy.

Additional reporting by Juan Ruiz

Featured image by Shutterstock

Featured image by (Photo by Shutterstock)
Editorial disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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Card Rating is based on the opinion of TPG‘s editors and is not influenced by the card issuer.
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3XEarn 3 Points per $1 spent at Restaurants and Supermarkets
3XEarn 3 Points per $1 spent at Gas Stations, Air Travel and Hotels
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  • Intro Offer
    For a limited time, earn 80,000 bonus ThankYou® Points after you spend $4,000 in purchases within the first 3 months of account opening

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  • Annual Fee

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    Credit ranges are a variation of FICO© Score 8, one of many types of credit scores lenders may use when considering your credit card application.

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Why We Chose It

The Citi Premier’s 3 points per dollar spent across a wide range of popular categories is one of the more lucrative offerings in the world of points and miles. The Citi Premier comes with a $95 annual fee and is currently offering a solid sign up bonus of 80,000 points after you spend $4,000 on purchases within the first three months. It also has some valuable transfer partners to make the most of your rewards. Add in access to Citi Entertainment plus a $100 hotel credit for any single-stay hotel booking that exceeds $500 or more, excluding taxes and fees, booked through the Citi travel website, there are few reasons why the Citi Premier should not be in every traveler’s wallet.

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  • Points transfer to 16 airline programs, from JetBlue to Virgin Atlantic.
  • World Elite Mastercard benefits, extended warranty, damage and theft protection.

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  • $95 annual fee
  • Lacks travel protections that other travel rewards cards come with
  • For a limited time, earn 80,000 bonus ThankYou® Points after you spend $4,000 in purchases within the first 3 months of account opening
  • Earn 3 Points per $1 spent at Restaurants and Supermarkets
  • Earn 3 Points per $1 spent at Gas Stations, Air Travel and Hotels
  • Earn 1 Point per $1 spent on all other purchases
  • Annual Hotel Savings Benefit
  • 80,000 Points are redeemable for $800 in gift cards when redeemed at thankyou.com
  • No expiration and no limit to the amount of points you can earn with this card
  • No Foreign Transaction Fees on purchases