How do bankruptcies affect your credit score?
This post contains references to products from one or more of our advertisers. We may receive compensation when you click on links to those products. Terms apply to the offers listed on this page. For an explanation of our Advertising Policy, visit this page.
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.
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.
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.
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.
Are you eligible for a credit card after filing for bankruptcy?
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.
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
Welcome to The Points Guy!
Earn 50,000 bonus miles and 5,000 Medallion® Qualification Miles (MQMs) after you spend $2,000 in purchases on your new card in your first three months of card membership. Plus, earn up to $100 back in statement credits for eligible purchases at U.S. restaurants with your card within the first 3 months of membership.
With Status Boost™, earn 10,000 Medallion Qualification Miles (MQMs) after you spend $25,000 in purchases on your Card in a calendar year, up to two times per year getting you closer to Medallion Status. Earn 3X Miles on Delta purchases and purchases made directly with hotels, 2X Miles at restaurants and at U.S. supermarkets and earn 1X Mile on all other eligible purchases. Terms Apply.
- Earn 50,000 bonus miles and 5,000 Medallion® Qualification Miles (MQMs) after you spend $2,000 in purchases on your new Card in your first 3 months.
- Plus, earn up to $100 back in statement credits for eligible purchases at US restaurants with your card within the first 3 months of membership.
- Accelerate your path to Medallion Status, with Status Boost®. Plus, in 2021 you can earn even more bonus Medallion® Qualification Miles (MQMs) to help you reach Medallion Status.
- Earn 3X Miles on Delta purchases and purchases made directly with hotels.
- Earn 2X Miles at restaurants worldwide, including takeout and delivery and at U.S. supermarkets.
- Earn 1X Miles on all other eligible purchases.
- Receive a Domestic Main Cabin round-trip companion certificate each year upon renewal of your Card. *Payment of the government imposed taxes and fees of no more than $75 for roundtrip domestic flights (for itineraries with up to four flight segments) is required. Baggage charges and other restrictions apply. See terms and conditions for details.
- Enjoy your first checked bag free on Delta flights.
- Fee Credit for Global Entry or TSA Pre✓®.
- Enjoy an exclusive rate of $39 per person per visit to enter the Delta Sky Club® for you and up to two guests when traveling on a Delta flight.
- No Foreign Transaction Fees.
- $250 Annual Fee.
- Terms Apply.
- See Rates & Fees