The Effect of Bankruptcy on Your Credit Report

The effect on your credit report after a bankruptcy filing is not a simple answer but is dependent on a number of factors. Creditors utilize the information on your credit report to assess the credit risk they face in providing you a loan or credit line. To better understand how a bankruptcy filling affects your credit score you need to first understand how your credit score works. First lets examine what is generally used in calculating your FICO Score:

Past Payment History-35% of your total credit score is based on your past payment history, which includes late payments, and bankruptcy filings.

Debt Amounts-30% of your total credit score is based on your debt amounts. The amount of debt you carry from credit cards, mortgages and loans, in comparison to your credit limit availability affects how creditors view whether you can handle debt responsibly.

Credit History-15% of your total credit score examines the length of credit history which takes into account how long an account has been open and the most recent activity.

Credit Mix-10% of your total credit score generally looks at your credit mix. This area examines the types of credit accounts that you have available. Having a good mix of different types of credit accounts is favorable is assessing your credit risk.

Credit Inquiries-10% of your total score examines items such as credit inquiries. Inquiries from new applications for credit can adversely affect your score if too many new inquires are being made.

Bankruptcy Effects:

Past Payment History-Although you will receive a bankruptcy filing which will adversely affect the your past payment history, it legally should stop the continued reporting of creditors who have been discharged in bankruptcy. Discharged creditors have no legal basis to continue to report any negative information on your credit report after filing for bankruptcy. This means that creditors that were discharged in bankruptcy should not be reporting negative information such as late payments, foreclosures and repossessions that occurred after filing. This can be a positive factor for individuals who have a long history of late payments, since this will allow you to start rebuilding a credit history without having discharged creditors continuing to report late payments. .

Debt Amounts-Receiving a bankruptcy discharge will positively affect the amount of debt your carry on your credit report. The debts that have been discharged in bankruptcy are no longer valid obligations that you have toward the creditor, therefore the debt amounts should be reported as a $0 balance. In some instances a bankruptcy discharge can result in an increase in your credit score, with the balances on your credit report being listed as $0.

Credit History and Credit Mix-As result of bankruptcy filing many of your credit accounts will be closed which affect how long an account has been open and your credit mix. Generally in my experience individuals who have filed for bankruptcy have not had a lot of difficulty applying for new credit accounts and as a result to reestablishing a credit history with a mix of accounts.

Although there is no easy answer to the effect that bankruptcy has on your credit score, the positive side is that your credit score can recover from a bankruptcy filing and can sometimes increase after receiving a discharge. The effects on your credit score after filing for bankruptcy are also highly dependent on the choices you make after filing for bankruptcy and the credit history you decide to establish after your bankruptcy. The most important aspect to keep in mind, is that after filing for bankruptcy, you generally can reestablish your credit score to a moderate to good level after 2 to 3 years of positive reporting history.

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