How Does Bankruptcy Affect A Credit Score?


Many clients ask how their bankruptcy will affect their credit score. At the time that anyone first considers bankruptcy, likely, they have probably either started missing payments or are on the verge of missing payments. An article in the Los Angeles Times discussed fixing credit after bankruptcy and the article found that bankruptcy may not affect credit scores as badly as the general public may think:

Filing for bankruptcy may have actually helped your scores. Researchers at the Federal Reserve Bank of Philadelphia found scores typically plunged in the 18 months before people filed for bankruptcy and rose steadily afterward. The average credit score before someone filed Chapter 7 was 538.2 on Equifax’s 280-to-850 scoring range. By the time filers’ cases were discharged, their average score was 620.3.

The presence of a bankruptcy and the length of time it has been on a credit report are the most significant determining factors related to how bankruptcy affects a credit score.

Only the public record of a chapter 7 bankruptcy lasts for 10 years. All other bankruptcy references, including Chapter 13 public record items, third-party collection debts, judgments, and tax liens discharged through bankruptcy, and any trade lines that state “account included in bankruptcy” remain on a credit report for seven years. Once these entries fail to appear, a credit score may start to increase.

Bankruptcy does not affect all debtors equally. A bankruptcy debtor’s credit score will consider and factor in the amount of debt discharged and the proportion of negative to positive accounts on a credit report. Debtors with a relatively low amount of debt and only a few accounts included in their bankruptcy will have a higher credit score than those debtors whose bankruptcy discharged more debt.

While bankruptcy may help eliminate debt, these accounts will not disappear from a credit report but, rather, will remain on a credit report and affect a credit score for seven to 10 years, although their impact will lessen over time.

While debtors should expect a dramatically lower credit score following bankruptcy, Smart credit management should eventually restore credit. After four or five years, a score in the good credit score range is even possible. After bankruptcy, debtors may immediately begin to restore credit by:

  • Adding new credit, such as secured credit cards or small installment loans, to offset the negative information on your credit report
  • Making timely debt payments
  • Keeping credit card balances under 30% usage

Depending on an individual’s circumstances, bankruptcy can eliminate debts through liquidation of assets in a Chapter 7 case, which typically results in many no-asset cases where debtors lose nothing, or through a reorganization in a Chapter 13 where creditors are typically repaid a reduced amount over time. and most, if not all, property is retained. Filing bankruptcy stops annoying debt collection efforts, even after the creditor has already filed a lawsuit.

Thus, bankruptcy may be an effective, cost-efficient option, especially when taking into consideration the effects on a bankruptcy debtor’s credit report.

Theron Morrison founded the Morrison Law Group providing superior legal services to every client. We pride ourselves on quality, experienced, and caring legal representation. When financial obligations become overwhelming, and no solution seems apparent, we can provide the necessary guidance, assistance, and hope that clients deserve. After debtors receive their discharge, we continue to deliver outstanding service protecting them from unscrupulous and dishonest creditors while helping them take measures to restore their credit.

A former “National Bankruptcy Attorney of the Year,” Theron Morrison leads the Morrison Law Group, one of Utah’s most respected law firms, in assisting thousands of Utah residents to solve financial problems by filing bankruptcy. We offer debt relief services related to chapter 7 and chapter 13 bankruptcy, workouts, delinquent taxes, loan modifications, short sales, student loans, and defending the residents, consumers, and taxpayers of Utah against illegal collection. Contact the Morrison Law Group today at 801-456-9933 to consult with an experienced bankruptcy and debt solution attorney.

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Theron Morrison

Utah’s top bankruptcy and consumer protection attorney.