Bankruptcies and Foreclosures Remain on Your Credit Score typically for seven to 10 years. After bankruptcy or foreclosure, your credit score may drop more than 200 points.
However, a borrower who works hard to reestablish good credit may be viewed more kindly the lender. In addition, the circumstances surrounding the bankruptcy may also influence a lender’s decision. For example, if you went bankrupt because you were laid off from your job, the lender may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and lived beyond your means, it is unlikely the lender will readily give you a break.
There are lots of myths about how your credit score is impacted and how long Bankruptcies and Foreclosures Remain on Your Credit Score. If you understand reality, you can take steps to mitigate the impact of a bankruptcy and revive your credit score more quickly.
Myth #1: Having no negative information on your credit report prior to bankruptcy leads to a higher post-bankruptcy credit score than if your report contained derogatory information prior to the filing.
Fact #1: While intuitively this might make sense, in reality a positive payment history on an account prior to it being included in bankruptcy does very little toward minimizing the damage to your score. Simply the presence of bankruptcy information on the credit report and, most importantly, the length of time since the information first appeared, are the strongest determining factors.
Myth #2: All Bankruptcies and Foreclosures Remain on Your Credit Score for 10 years, without exception.
Fact #2: Actually, only the public record of a Chapter 7 bankruptcy lasts for 10 years. All other bankruptcy references on a credit report remain for 7 years, such as:
- Trade lines indicating “Account included in bankruptcy”
- Third-party collection debts, judgements and tax liens discharged through bankruptcy
- Chapter 13 public record items
Myth #3: You will have a low credit score for as long as the bankruptcy information remains on your credit report.
Fact #3: While it’s true that you should not expect a high score following bankruptcy, if you manage your credit optimally in its aftermath you can be looking at a 700 score or higher after only about 4-5 years. Such a speedy score recovery requires a few things though:
- Adding “positive” credit, such as secured credit cards and installment loans, to help offset the negatives on the credit report
- On-time payments on all remaining and recently acquired debt
- Low balances on credit cards that make up less than 25 percent of the credit limits
Myth #4: A bankruptcy will impact all consumers similarly, regardless of the amount of debt discharged or the number of debts included in the bankruptcy.
Fact #4: Not true, as certain credit scoring factors specifically evaluate the magnitude of the bankruptcy, such as the amount of debt discharged and the proportion of negative to positive accounts on the credit report. This means that a relatively low debt total spread over only a few accounts included in bankruptcy can lead to a higher post-bankruptcy score than one for which the scope of the bankruptcy is more extensive.
Myth #5: Any credit history associated with accounts included in bankruptcy will be removed from your credit report.
Fact #5: On the contrary, all of the bankruptcy-related history continues to appear on your credit report and is considered by the scoring formulas for the entire 7 to 10 post-bankruptcy years, though the negative impact diminishes over time.
So, before taking the big leap into bankruptcy, consult a bankruptcy attorney and learn the facts about how credit scores treat bankruptcy. You just may be able to minimize the damage and get a jump on re-establishing your credit after filing.
Bankruptcy & Future Lenders
Going through bankruptcy also puts all future lenders on notice that you have had difficulty repaying your debts; creditors are more likely to either refuse to extend credit, or to make you pay (through higher interest rates, for example) for the additional risk they are taking in extending you credit.
However, even with a bankruptcy on your credit report, many lenders will still do business with you and extend you new credit lines. This is because the discharge obtained in bankruptcy leaves all future earnings free from the claims of past creditors. Essentially, they know that you now have more funds available to spend. Some creditors also see you as less of a risk because they know that you cannot file another bankruptcy for several years, reducing the risk of their accounts being lost in a bankruptcy discharge.
If you have gone through a tough financial situation and would like to buy a new home now but worry about your credit score, please give us a call at 240-401-5577 or email me at Lise@lisehowe.com. I work with several great lenders who can help you repair your credit so that you will be able to buy that dream home much sooner than you expected.
