Filing for bankruptcy is widely regarded as the least desirable option when facing financial trouble. Remember that filing for bankruptcy should be treated as a last resort, and shouldn’t be pursued unless you have exhausted all of your other options.
That being said, if you are in a financial situation that could require filing for bankruptcy, chances are that your credit score is already pretty low. This could be seen as a mixed blessing, because if your score is already low, declaring bankruptcy may not lower it by that much.
It is important to remember that filing bankruptcy will stay on your credit report for ten years. So even though it may not necessarily lower your score a considerable amount, it will show up on your credit report for an entire decade. A bright side to this is that creditors know once you file bankruptcy, you cannot file again for seven years, which could possibly provide an incentive for them for them to open lines of credit to you.
The effect bankruptcy has on your credit score really depends on the type of bankruptcy you file.
Chapter 7 bankruptcy and your credit score
Filing chapter 7 bankruptcy is the worst thing you can do to your credit rating. This type of bankruptcy can provide you the relief of getting rid of any debt you owe other than child support, alimony and unpaid taxes, but puts a big mark on your credit report.
After filing chapter 7, applying for loans or opening new lines of credit will be extremely difficult for at least two years, and maybe even longer.
Chapter 13 bankruptcy and your credit score
Chapter 13 bankruptcy does not absolve you from paying your debts, but rather gives you time to work out a payment plan. If you still have regular income, chapter 13 is almost always a better option than chapter 7 due to the lesser effects it will have on your credit score.
Filing chapter 13 bankruptcy signifies that you are willing to pay your debts rather than discharge them, which will look better to creditors than filing chapter 7. You should be able to open new lines of credit roughly a year after filing chapter 13.
If you or someone you knows is considering bankruptcy, be aware that there are bankruptcy alternatives. These can provide true measure of debt relief without the need for a personal bankruptcy filing.