Will Items Included in a Bankruptcy Lower My Credit Score?

All debts must be listed in bankruptcy, with the filing causing a sudden drop in credit scores once the bankruptcy appears on credit reports. Major credit bureaus such as Equifax, TransUnion and Experian report bankruptcy information for 10 years, making it difficult to obtain credit at reasonable rates. The impact lessens over time, however. MSN Money reports that some people emerging from bankruptcy build excellent credit scores after a few years.

Poor Credit

Lenders use credit scores to evaluate creditworthiness. Credit scores of 720 or higher are considered excellent, with overall scores ranging from 350 to 850. Many people start bankruptcy with poor credit because of excessive debt, late payments and other adverse credit events such as charge offs, court judgments, liens and accounts assigned to debt collection agencies. Each negative entry on a credit report potentially causes a drop in score.

Considerations

Credit scores lose significance during bankruptcy. Lenders are likely to consider the debtor an extremely poor credit risk because of the bankruptcy -- no matter what the credit score. Chapter 13, a popular form of bankruptcy, takes three to five years to complete. It allows people to pay all or a portion of their debts through a court-ordered payment plan. Chapter 13 helps people reorganize their debts and take on additional credit during the bankruptcy if needed. A debtor needing a used car to commute to work could petition the court for permission to take out an auto loan, for example. However, people in bankruptcy usually must accept exorbitant interest rates because of their poor credit standing.

Pitfalls

Borrowing while in bankruptcy can present problems. Chapter 13 requires monthly payments to be made to the court, with the trustee sending checks to creditors. In some instances, debtors must make direct payments to a secured lender while also paying separately into a court-ordered payment plan. The secured lender can repossess the secured property, such as an automobile, if the debtor fails to make payments as agreed. Theoretically, credit scores can rise and fall in bankruptcy. However, each individual credit situation is different. That makes it impossible to predict precisely how an active bankruptcy will affect a debtor's score.

Alternatives

Alternatives to bankruptcy should be considered. Programs such as debt settlement can quickly eliminate debt and are not as harmful to credit as bankruptcy. Debt settlement allows credit cards and other unsecured debts such as credit cards to be paid for less than the full balance. Settlements range from 20 to 70 percent of the balance depending on the age of the debt. Debt settlement is available only on unsecured credit such as credit cards. The Federal Trade Commission strongly recommends self-directed debt settlement because of abuses by for-profit firms. MSN Money reports that credit card companies will usually discuss settlement offers after accounts are about 90 days past due.