Credit After Bankruptcy & Foreclosure

Credit scores are determined by using a complex mathematic algorithm to translate a consumer's use and availability of credit into a rating between 300 and 800 points. The lower a consumer falls on the scale, the worse her credit appears, and the more she is considered a high risk for loans. The impact that a bankruptcy or foreclosure has on a credit report and score is nothing short of substantial.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy wipes the slate clean, allowing the borrower to have all debts discharged by creditors and collection agencies and for all reporting of delinquent debt on credit reports to cease. A Chapter 7 bankruptcy can instantly decrease a credit score by as much as 150 points, depending on the total amount of debt discharged. The higher the amount of total debt, the lower the score will dip. The bankruptcy filing will remain on a credit report for 7 years after it was filed, having a long-term impact on credit.

Chapter 13 Bankruptcy

Unlike a Chapter 7 bankruptcy, a Chapter 13 does not discharge all debt. In a Chapter 13 bankruptcy, creditors have the right to appear at the bankruptcy hearing. Creditors who appear in court receive a court-appointed repayment plan that the consumer is expected to adhere to under watch of a court-appointed trustee.

In a Chapter 13 bankruptcy the bankruptcy is not discharged by the courts at the conclusion of the hearing like a Chapter 7; it is discharged once the debts are settled. Since a Chapter 13 is not as drastic from a credit perspective, the drop in score averages around 80 points.

After a Chapter 13 bankruptcy, a consumer can rebuilt her score over as little as two years. However, there might be a maximum score that she will reach until the bankruptcy falls off of her credit report in the following 7 years.

Foreclosure

Foreclosure is the result of a mortgage default, where the bank secures the house as collateral for non-payment. There is little else as damaging to a credit history as a foreclosure. Once a foreclosure is filed and recorded, consumers can expect a drop in their credit score for as much as 200 points in a single day. It takes many years to rebuild credit after foreclosure.

Deficiency Judgments

After foreclosure, the bank has the right to file a deficiency judgment for any loss it suffered as a direct result of the foreclosure. The judgment follows the consumer and remains on his credit report for the next 10 years, and is a required item to pay off before ever making another property purchase.

Considerations

If a homeowner is facing foreclosure, declaring bankruptcy can provide a temporary stay on the foreclosure, giving the homeowner the chance to catch up on payments and reinstate the loan. If the owner cannot reach agreement with the lender or raise enough capital to reinstate the loan, the foreclosure can proceed. The bankruptcy drops her score, and the foreclosure will drop the score even further.