Why Declaring Bankruptcy is Harmful to Your Credit Score


Filing for bankruptcy is a difficult decision, especially for those who have already fallen on hard times financially. While formally declaring that you can’t pay your bills may seem like an honest solution, you’ll need to understand that doing so can have negative implications on your credit score. 

Bankruptcy can wreak havoc on your credit scores and may stay on your report for a long time. However, there are a few ways to repair your credit score after you file for bankruptcy. Here is what you can expect.

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Plummeting Credit Score

While there’s no way to tell just how many points your credit score will fall after bankruptcy, you can expect a significant impact. While the effects will vary based on your current credit score and extenuating circumstances, your score may plummet by 200 points or more, especially if you had a good or excellent credit score before bankruptcy. 

A lower credit score may drop only 130 to 150 points because it was already poor to begin with. 

Long Term Damage

Having a bankruptcy appear on your credit report will have a significant impact on your score for a long time. Bankruptcy can be on your credit report for ten years if it is a Chapter 7 bankruptcy, which is three years more than just regular debts. 

This means that while you can still build your credit back up over time, you’ll have a hard time getting the score to where it was before bankruptcy. Learn more about ecommerce payment.

Negative Impact Diminishes Over Time

Luckily, the significant negative impacts from bankruptcy on your credit score will slowly diminish over the next few years. You can slowly rebuild your credit as the impact fades into the past. Bankruptcy information will only affect your credit scores for as long as it remains on your credit report. Fortunately, the impact will lessen over time. You may even be able to see your score improving shortly after bankruptcy hits the report. 

This is because once you file for bankruptcy, you technically no longer owe the debts, which means that your credit utilization rate could improve. However, while you can still build your credit, it can take years to get it back to where it was before.

Merchant Accounts and Credit Score

When you want to accept credit cards for your business, you will need a bad credit merchant account from a bank or merchant services provider. One of the underwriting guidelines will be your credit score, so it’s important to improve your score after a bankruptcy as much as possible. 

Rebuilding Credit After Bankruptcy

To build your credit back up after bankruptcy, you can take the following steps.

Get a New Line of Credit

You may want to consider getting a new credit card or credit-builder loan to build a new history of payment that positively influences your credit score. 

Monitor Your Progress

The best way to make sure your credit is rebuilding is to monitor your success and watch how paying your bills on time boosts your credit each month. 

Settle Your Debts

As you can, make sure to settle all of the debts that you can. Any bankruptcy or items related to it should be removed as soon as you hit the seven- or ten-year mark, so make sure to follow up and ensure that it’s gone when it should be. 

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