A “credit score” is a number assigned to you by one of the credit reporting agencies, Experian, Trans Union or Equifax. It’s a measure of how safe you are as a borrower. If your score is above 700, especially if it’s above 750, you’re considered a safe risk. Below 600 is considered a bad risk. The score attempts to quantify the risk that you won’t repay a loan.
If you file bankruptcy, you are defaulting on all your credit obligations. You’re in effect saying, “I’m not going to pay these debts.” The creditors will have to write the debt from you off their books as an asset. Their risk that you won’t pay suddenly became 100%. It stands to reason, then, that filing bankruptcy will have a negative impact on your credit score. How badly that filing impacts your score is a matter of a number of things.
First, if you’re considering filing bankruptcy your credit score probably isn’t very high anyway. If you have to file, you’re likely behind on several debts. Maybe your house is in foreclosure, your car has been repossessed, judgments have been entered against you or your wages have been garnished. All of these things have already dinged your credit score to where you’re not in the “safe” category any longer. Filing bankruptcy will ding it a little more, but it’s not as if you’re suddenly going to drop from a 740 score to 500. You might drop from 610 to 500 but you were already near the bottom.
On the other hand, what does a bankruptcy do going forward? Yes, it will remain on your credit report for 10 years if you file Chapter 7 or seven years if you file Chapter 13. But after than one-line entry, everything else is, or should be, positive. And the farther you get from your filing date, the less relevant the bankruptcy becomes. Think of it this way. If you have judgments against you, those judgments remain alive for at least eight years and can be renewed indefinitely. So three or five years from now, those judgments are still current news to a prospective lender. That means your credit score is still low.
But if you file bankruptcy and eliminate those judgments, three or five years from now, the bankruptcy is three or five years in the past. If you’ve kept your credit clean since you filed, paid your bills on time, haven’t been sued for debts, your credit score will probably be up quite a bit three years after you file and it will only go up from there.
Bankruptcy shouldn’t be your first choice for getting out of debt. Sometimes it’s the only choice that makes sense. If you think that’s the case for you, please contact us.