How Much Your Credit Drops in Bankruptcy

If your bills, debts and other obligations have become financially crippling, it may be time to file for bankruptcy. Filing for bankruptcy is a complex legal process that has lasting effects on your finances and could cause major damage to your credit history for years. The credit score point-drop following bankruptcy varies depending on an individual's financial history and current credit score.

Credit Scores

Lenders use your credit history to evaluate the riskiness associated with doing business with you. If you have an outstanding track record of maintaining low debt balances, making on-time payments and accumulating a variety of credit account types (including installment loans such as home mortgages or student loans and revolving credit such as credit cards) this results in a high credit score. Low credit scores can be attributed to missed payments, late payments, high debt-to-income ratios or applying for multiple credit accounts at once, since this signals to lenders that you might be scurrying to amass funds. Filing for bankruptcy can devastate your credit if you previously held a high credit score; if your score tanked months ago because of accounts turned over to collection agencies or defaulted loans, this could mean a less significant tumble.

Bankruptcy

The two main bankruptcy types are the Chapter 13 bankruptcy and the Chapter 7 bankruptcy. In a Chapter 13 bankruptcy filing, known as an "individual debt adjustment" or "wage earner's plan," credit consumers negotiate with debtors to repay financial obligations within three to five years. Creditors may not begin or continue debt collection efforts during this time. The Chapter 7 bankruptcy filing involves liquidating all debtor assets and redistributing the proceeds to creditors. These two bankruptcy options have different effects on your credit score.

Effects

The first factor to take into consideration is current credit score. Those with higher credit scores will notice a more significant drop than those who've already lost points because of maxing out a revolving line of credit, making 30-day to 60-day late payments, foreclosing on a loan or entering debt settlement or debt consolidation agreements. These items alone can shave between 10 and 160 points from a person's credit score if he was in the 680 range on the 900-point scale. These same items can slash between 25 and 200 points for a credit consumer with a credit score of 750. Consumers with a 680 credit score may lose between 120 and 150 points in a Chapter 13 bankruptcy or between 130 and 170 points in a Chapter 7 bankruptcy. Consumers with a 750 score may lose between 150 to 210 points in a Chapter 13 bankruptcy or between 200 and 250 points in a Chapter 7 bankruptcy.

Action Steps

To help your credit recuperate after filing for bankruptcy, check your credit report for any errors that may be corrected to improve your score. Reign in spending and make regular on-time payments on remaining debts in excess of the minimum required. Apply for a secured credit card; creditors issue cards to riskier consumers by requiring them to deposit an amount equal to their balance limit with their bank. After seven to 10 years, request that all bankruptcy-related items be cleared from your credit history.