Why Your Credit Score Sucks After Bankruptcy (and What to Do About It)

You had some bill problems — maybe it was the Great Recession, the mortgage mess, or just a financial hiccup that threw you into a tailspin. Whatever the cause, you made the decision to wipe the slate clean by going through bankruptcy.

And it sucked. You spent money on a lawyer (or did it yourself), exposed your financial problems for anyone with access to the electronic court system to see, and sat in front of a trustee to answer questions about your assets and debts.

None of it was particularly difficult, but the stress of the process left you depressed, anxious, and feeling like a failure. Overall, the emotional costs outweighed the financial ones.

But with family and friends around you, things got better. The sun rose another day, and the notable absence of bills and collection letters eventually made you realize you were going to be alright.

Better than alright, in fact.

Except there’s this one nagging problem. Your credit score.

Now that you’re out of debt and feeling pretty good about your financial prospects, you find yourself thinking about one day getting a new car or buying a place of your own. That’s going to take good credit, and you know that bankruptcy filing is going to sink your chances in the credit world for a long time.

Or will it?

How Long Until Bankruptcy Falls Off Your Credit Report?

Talk to different bankruptcy attorneys and credit professionals, and you’re sure to get just as many answers about the length of time the bankruptcy stays on your credit report before it is removed.

According to Experian, the credit reporting agency:

The bankruptcy record from the court is deleted either seven years or 10 years from the filing date of the bankruptcy depending on the chapter you declared.
Chapter 13 bankruptcy is deleted seven years from the filing date because it requires at least a partial repayment of the debts you owe. Chapter 7 bankruptcy is deleted 10 years from the filing date because none of the debt is repaid.
Individual accounts included in bankruptcy often are deleted from your credit history before the bankruptcy public record. Usually, a person declaring bankruptcy already is having serious difficulty paying their debts. Accounts are often seriously delinquent before the bankruptcy.
All delinquent accounts are deleted seven years from the original delinquency date, which is the date the account first became delinquent and was never again current. Declaring bankruptcy does not alter the original delinquency or extend the time the account remains on the credit report.
If the account was delinquent before being included in the bankruptcy, it will probably be deleted before the bankruptcy public record because the original delinquency date is typically earlier than the bankruptcy filing date.

(The boldface in that quote is my work, not from the credit reporting agency)

Trying to Remove Bankruptcy From Your Credit Report

Under the Fair Credit Reporting Act, a credit reporting agency has the right to report any information that is truthful and accurate. That includes the fact that you filed for bankruptcy.

You’re allowed to dispute inaccurate information on your credit report and demand that the credit reporting agency conduct an investigation. If the investigation reveals that you’re correct then the inaccuracy should be removed from your credit report.

In the case of bankruptcy, reporting it on your credit report is accurate. Trying to remove it by saying that it’s inaccurate is a lie. You wouldn’t be disputing an inaccuracy, you’d be trying to game the system.

That’s what so many of the credit repair scams do — try to game the system.

And though it’s tempting to try to get a leg up, it’s bound to fail in the long run because the credit reporting agencies are smarter than the rest of us mere mortals.

The Real Impact of Bankruptcy on Credit Scores

It’s easy to believe that your credit score will plummet the minute you file for bankruptcy — after all, it’s what we’ve all been told for years.

But it’s not true. And the Federal Reserve Bank of New York did a study comparing people who filed for bankruptcy with those who were deep in debt but didn’t file for bankruptcy.

Their results? According to the report, released in May 2015, “the individuals who do go bankrupt have lower credit scores than those who do not go bankrupt. The individuals who go bankrupt experience a sharp boost in their credit score after bankruptcy, whereas the recovery in credit score is much lower for individuals who do not go bankrupt.”

Chart reproduced from the Federal Reserve Bank of New York

Just to clear things up — if you file for bankruptcy your credit score will actually no up, not down.

So Why Does Your Credit Suck?

Your credit score is low after bankruptcy because you don’t owe money to anyone, so you don’t have a positive record of payment.

Even if you kept your home or car through the bankruptcy process, new payments won’t be reflected on your credit report unless you formally reaffirmed the debt through the court process.

To improve your credit score, you’ve got to take steps to start proving your creditworthiness.

Open up a secured credit card.

Pay any debts not wiped out in your bankruptcy in a timely manner.

Keep a record of your post-bankruptcy payments to the mortgage company or car lender, and send that record to the credit reporting agencies as a consumer statement to be included with your credit report.

Focus on budgeting and stabilizing yours finances.

Do that for awhile — usually 12 to 18 months — and you’ll see your credit score improve on its own.

No gaming the system necessary.

Jay S. Fleischman is a consumer protection lawyer who helps people with student loan problems and bankruptcy issues. He writes at Consumer Help Central and is the host of The Student Loan Show, a weekly podcast on issues surrounding higher education and student loans.

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