Bankruptcy: Will it Ruin my Credit?

July 1, 2022

One of the most common questions we are asked is “How bad will this bankruptcy hurt our credit?!?”

And this question is valid. We leave in a society where virtually all home, car and even insurance decisions are affected by our credit score. So let’s unpack this question further.

I am not going to lie to you and say that a bankruptcy will not affect your credit score at all. Anyone that says that to you is lying. However, what I can say is that a bankruptcy is not a death sentence for your credit score. As with most things, time heals.

The first 1-3 months your credit score will drop. But that is when the rebound occurs. The further you move from your filing date, the less the bankruptcy will hurt your score. Surveying our previous clients, we find that those that came into our office with a score in the low 600’s, had their score rebound back into the 600’s approximately 12-18 months after filing. Those that came in with a credit score in the high 600’s had their score rebound back into the high 600’s approximately 18-24 months after filing.

What can you do to help your score rebound on the quicker side? Utilize credit responsibly. Get a secured credit card, and ONLY use that card for gasoline, and pay it off every month. Don’t use it for any other purposes, and never carry a balance at the end of the month.

What about getting a home loan? If you are looking to get a conventional mortgage, they will want you to be 24 months out of your bankruptcy and a credit score of 620 or higher.

What about a vehicle loan? Surprisingly, it will not be that difficult to get a vehicle loan. However, be prepared for a high interest rate the first year or two.

Something to keep in mind when looking into how a bankruptcy will impact your credit score, is that some creditors will actually view you to be MORE credit worthy after you file for bankruptcy. Why is this?

  1. They know your are now debt free, and you have more disposable income now to pay your debt, than you did prior to filing for bankruptcy
  2. They know that you cannot file a bankruptcy again for 8 years (if Ch 7 to Ch 7)

For creditors it is all about risk. The less of a risk that you are, the more likely they will want to loan you money.