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Worst-Case Scenario: What Does Bankruptcy Actually Do to My Credit Score?

Help! Do I Have to Go Through Foreclosure After Bankruptcy?

It's the big, bad boogeyman of credit scores: bankruptcy. A formal declaration that you are incapable of paying off all your debts as agreed. And while taking such action could spare you from paying off all — or at least some — of the loans that put you so badly in the red, you can expect your credit to take a pretty big hit.

"Consumers should be aware that declaring bankruptcy has the greatest single impact on credit scores," Rod Griffin, Director of Public Education at Experian, said in an email. "When you declare bankruptcy, you take legal action so that you do not have to repay your debts, or only have to repay a portion of them. While you are no longer responsible for your debts, the fact remains that you did not pay them."

But how badly can this hurt you? Here's how bankruptcy actually affects your credit scores.

What's the Damage?

It can be hard to pinpoint exactly how much of hit your score will take once bankruptcy appears on your credit report. That'll vary depending on what else is on your report and where your score stands at the time. But, generally speaking, the higher the score, the harder the fall.

"Someone with a high FICO score (mid 700s or above) could see their score drop as much as 200-plus points as a result of a bankruptcy posting to their file," Ethan Dornhelm, a principle scientist for the popular credit scoring model, said in an email. Someone with a more average score of 680 could experience less of a drop (between 130 and 150 points, FICO found). But, in all scenarios, you'll likely find yourself saddled with bad credit (think below 600) post-bankruptcy.

How Long Will My Score Be Depressed?

Here's even more bad news for those who file bankruptcy. " A bankruptcy can remain on your credit report for 10 years, and can affect your ability to obtain credit during the entire time," Griffin said. (Note: The major credit reporting agencies will typically remove completed Chapter 13 cases seven years from the filing date.) And your score will also be subject to any negative occurrences that happened before you filed.

"If the accounts included in bankruptcy were delinquent at the time of filing, they will be deleted seven years from the original delinquency date," he said. "The original delinquency date occurred before the bankruptcy , so the accounts will be deleted before the bankruptcy public record."

The good news is your score should start to rebound almost immediately after the bankruptcy hits your report, assuming no new negative information arises, of course.

"FICO research found that for a representative consumer with a 680 FICO score (before the bankruptcy filing), it would take them roughly 5 years to return back to that same score level," Dornhelm said.

While that score won't help you qualify for the best terms and conditions, it could be enough to net future financing. (Mortgage experts, for instance, peg the the minimum credit score requirements for conventional home loans at around 620.)

And there are some steps you can take to avoid a long-term worst-case scenario, including:

  1. Make sure the bankruptcy is reported correctly. In order for the healing process to begin, make sure all the accounts included in your bankruptcy are marked as discharged and labeled with a zero balance on all of your credit reports. You can check your credit reports for free by pulling them at AnnualCreditReport.com.

  2. Start establishing a positive payment history. Payment history is generally the most important factor among credit scoring models, so it's imperative you demonstrate an ability to repay loans as agreed. "One possible approach to re-establishing credit is to apply for a secured credit card and continually make all of your payments on time," Dornhelm said. "As time passes and the impact of the bankruptcy lessens, you might apply for a traditional credit card and also continually make all of your payments on time." You can also monitor your progress as you try to fix your credit by viewing your two free credit scores each month on Credit.com.

  3. Get the bankruptcy removed from your credit reports as soon as it's eligible for deletion. If your bankruptcy is appearing on your report after that 10-year mark, you can dispute its inclusion with the credit bureaus. You can go here to find out more about getting errors off of your credit reports.

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