If you file Chapter 7, it can significantly impact your credit score. However, filing for bankruptcy is not a death sentence for your credit rating. Some debtors report their credit score went up after filing Chapter 7. The time it takes for the credit score to increase varies depending on the debtor’s situation when they filed for bankruptcy and their actions after discharge.
What Happens to My Credit Score When I File Chapter 7 Bankruptcy?
The primary benefit of filing Chapter 7 is eliminating unsecured debts you cannot pay. Unsecured debts subject to a bankruptcy discharge include credit cards, personal loans, medical bills, and old utility bills.
Generally, when someone initially files a bankruptcy petition, their credit score drops. How much it drops depends on numerous factors. Typically, when someone files for Chapter 7, their credit score has already dropped because of late payments and missed payments.
Therefore, a Chapter 7 might not cause a significant drop. However, if someone has good credit, a Chapter 7 could drop their credit score significantly.
A Chapter 7 bankruptcy remains on your credit report for ten years (Chapter 13 bankruptcy remains on a credit report for seven years). However, it does not take ten years for you to see an improvement in your credit score. Many debtors notice an improvement within one year of filing Chapter 7. You can check out this article talking about My Credit Score Rebuilding Experience After Chapter 7 Bankruptcy, an experience that John at Ascend had first-hand experience on.
Should I File Bankruptcy?
When you’re in a financial hardship, a common question will most likely cross your mind is “Should I file bankruptcy?”
Which is a valid question to ask yourself, to help you reach a decision, we created this quiz below to help inform you whether or not bankruptcy is right for you.
The data includes qualification estimates for bankruptcy income limits for filings from early 2024. If the income limits for Chapter 7 bankruptcy change in May and November, we will have those numbers already updated in the quiz below.
There are a couple of things the quiz will help provide for you:
- An estimate if you qualify for Chapter 7 Bankruptcy.
- Estimated costs for Chapter 7 and Chapter 13.
- Comparison between Chapter 7 vs Chapter 13 as well as the pros and cons of filing for bankruptcy.
- Comparison between bankruptcy and other alternatives such as debt management and debt settlement.
How Does Filing Chapter 7 Cause My Credit Score to Go Up?
When you file a Chapter 7 bankruptcy case, several things happen, including:
Stops Negative Credit Activity
The bankruptcy stops negative credit activity. Your creditors cannot continue to report missed and past-due payments. Payment history represents 35% of your credit score. Stopping negative credit activity is key to improving a credit score.
Decreases Amounts Owed
When debts are discharged, they are shown as discharged in bankruptcy with a zero balance on your credit report. The amount you owe accounts for 30% of your credit score. Therefore, the bankruptcy filing impacts 30% of a credit score. The less money you owe, the better your credit score.
Lowers Debt to Income Ratio
Another factor in your credit score is how much money you earn versus how much you owe. When the debts are discharged in Chapter 7, your debt-to-income ratio improves.
Credit Ratings Improve Over Time
As more time passes, your credit score will improve if you continue to pay your bills on time and not incur large amounts of debt. The negative information will fall off the reports and be replaced by neutral or positive information. If you want to help increase your credit score after Chapter 7, there are some steps you can take.
Improving Your Credit Score After Bankruptcy
Your financial choices post-bankruptcy impact how quickly and by how much your credit rating improves. Ways you can rebuild credit after bankruptcy include:
- Check Your Credit Reports
Obtain copies of all three credit reports to review. Free credit reports are available once every 12 months. Check each credit report for mistakes. For example, do all debts discharged in Chapter 7 have a zero balance and say discharged in bankruptcy? Are creditors continuing to report negative information for accounts that were discharged?
Contact the credit reporting agency and the creditor to report mistakes. Monitor the report to ensure mistakes are corrected. These mistakes could delay the improvement of your credit score.
- Continue Paying Secured Debts on Time
If you are paying a car loan or other secured loan, make all payments on time. Review your reports to ensure the creditor reports positive information for the account (i.e., full payments made on time). The positive information helps counteract some of the negative information to improve your score. Remember, payment history accounts for 35% of your credit score.
- Become an Authorized User
If you have a trusted family member with good credit, ask them to add you as an authorized user on their credit card. As they make on-time payments, your credit report will be reflected positively.
- Get a Secured Credit Card
A secured credit card requires you to deposit with the creditor. Your credit limit is usually the balance of the deposit. You use the secured card to make charges and pay on time. As you continue using the card wisely, it can help improve your credit score.
- Keep Balances Low
When you begin using credit again, keep the balances low. High credit balances will lower your credit score.
Have You Created a Personal Budget?
The mandatory credit counseling course and debtor education course required for your Chapter 7 bankruptcy case discussed the importance of creating a budget. When you have a budget, you are less likely to make mistakes that could lead to financial problems.
Your budget should include an item for emergency savings. Treat the payment as a monthly bill and put the money into a savings account. Emergency savings help you avoid debt when an unexpected expense arises, such as a flat tire, broken refrigerator, or doctor’s bill.
Do You Need Help Getting Out of Debt?
The “Should I File Bankruptcy Quiz” helps you determine if you could qualify for Chapter 7 bankruptcy to help you eliminate your debts and rebuild your credit score.
Most Chapter 7 bankruptcy cases are discharged and closed in four to six months. If you have questions about filing for bankruptcy, contact us to speak with a knowledgeable, friendly representative.
You can also check out How to File Chapter 7 with No Money if you feel like you won’t be able to afford the standard fees for Chapter 7.
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