What happens to my credit score when I file bankruptcy?

March 6, 2015

At our Indianapolis-area bankruptcy attorney office, we have a lot of clients that worry bankruptcy will destroy their credit score.   Our clients feel as if they will never be able to build their credit back up.  We encounter a lot of misconceptions and we are asked many times, “What happens to my credit score when I file bankruptcy?”  What a lot of our clients don’t realize is that bankruptcy can quickly improve someone’s credit score if they are delinquent on accounts or if their credit score is already in the tank.

Often times when someone files bankruptcy, their credit score can get better right away.  This is because the delinquent accounts, no-pays, and late payments are eliminated right away.  When a person files for bankruptcy, all the previous items on a credit report are wiped away and the person gets a fresh start.

Let me give you a brief illustration of what happens to a credit score in bankruptcy.  Let’s say there is “A” credit and “F” credit.  “A” credit would be the highest credit you could achieve and “F” would be the lowest.  Often times when someone comes in and files bankruptcy, they have “D” or “F” credit because they have delinquent accounts.  When they file for bankruptcy, all the creditor’s reports of the bad credit are eliminated and usually the person ends up with “C” credit immediately after filing bankruptcy.  A few people may see their credit score is negatively affected by bankruptcy, but this is probably because they had “A” or “B” credit.

Some of the reason for this instant “C” credit rating is because your potential creditors know that you have recently eliminated your debt.   They also know that you cannot file bankruptcy under Chapter 7 again for 8 years, which makes the creditor more likely to offer certain types of loans.

After you file for bankruptcy, you can build your credit back up.  A lot of times our clients receive offers for smaller-balance credit cards or finance offers for automobiles in the mail immediately after their bankruptcy case.  After 1-2 years our clients are usually eligible for larger financing options like mortgage loans.  Many times after two years, are clients are eligible for home mortgage programs such as FHA financing.

Although there is a misconception out there that bankruptcy can ruin your credit, a lot of times it is actually the first step to rebuilding your credit score.  If you have any more questions about filing bankruptcy or credit, don’t hesitate to give our office a call to set up a free consultation.

– Indiana Bankruptcy Attorney John Bymaster.

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