One of the reasons that people delay bankruptcy filings is the fear of how it will impact their credit. There is a pervasive myth that those who file bankruptcy will never have good credit again or will struggle to qualify for financing after they file.
While it is certainly true that bankruptcy impacts both your credit score and your ability to get new lines of credit, the impact is neither permanent nor as negative as people often think it is. In fact, after your discharge, you may eventually have a higher credit score than you did before you filed.
How bankruptcy affects your credit in the short term
Most people see a noteworthy point drop on their credit score immediately after they file for bankruptcy. The average drop is between 130 and 200 points. That can seem like a devastating blow, but the good news is that the amount of impact the bankruptcy has on your score goes down a little bit every month.
Additionally, the bankruptcy will become the only negative mark on your report as those overdue and over-limit accounts, collections accounts and judgments will no longer be visible to those revealing your credit.
How bankruptcy affects your credit in the long term
Once the courts approve your bankruptcy discharge, you will be able to start building your credit back up again. People often start receiving mediocre credit card offers within weeks of their bankruptcy discharge. You may have to make a deposit or accept a card with a monthly fee, but the sooner you have a new line of credit, the sooner you’ll have a long-term credit history.
Although you likely will struggle to qualify for the best terms, you can probably finance a vehicle or qualify for a mortgage within two to three years of your bankruptcy discharge. Better credit card offers will also start coming once you have a history of making on-time payments.
When your bankruptcy comes off your credit report in either seven years for Chapter 13 or 10 years for Chapter 7 filings, your score could very well be higher than it was before you filed because you have a lengthy credit history and ideally no negative marks because you committed yourself to making on-time payments after your discharge.