As you consider filing for Chapter 7 or Chapter 13 bankruptcy, you may be understandably concerned about the effect it will have on your credit score.
The damage done to your score will depend most heavily on how good your credit was from the start.
If you already have a history of financial delinquency on many different accounts and you have a large debt-to-asset ratio, you already have a poor credit score—meaning bankruptcy will not be able to do much to damage it. Your score will still dip, but there is only so far it is able to fall.
However, if you had an excellent credit rating before filing for bankruptcy, you could see a big plunge to you credit.
According to FICO, which is the most widely used credit scoring agency in the United States, it makes no discernible difference to your credit score whether you file for Chapter 7 or Chapter 13 bankruptcy. However, individual creditors might view someone who files for Chapter 13 bankruptcy as being more responsible than someone who files for Chapter 7, given that Chapter 13 involves the debtor sticking to a repayment plan.
Bankruptcy could help better your credit in the long term
Bankruptcy certainly will not provide you with any immediate assistance from a credit score perspective, but in it can be the best way to ultimately improve your credit score.
If you are falling behind on your loan payments or have accounts going through collection, bankruptcy can wipe the slate clean and get you back on your feet much quicker than other forms of debt management. Bankruptcy can greatly reduce your overall debt load, making it easier for you to regain control of your finances and make your payments on time. In the long term, making these timely payments and reducing your debt-to-income ratio helps you build up your credit score.
If you instead avoid filing for bankruptcy and continue to make late payments and default on your loans, you will continue to be trapped in a credit score nightmare.
Securing loans or credit after filing for bankruptcy
Your ability to get new loans or credit after filing for bankruptcy depends mostly on what you are looking for. Bankruptcy filers often find themselves overwhelmed with credit card offers after the bankruptcy is final, but these offers tend to come with extremely high interest rates and fees.
You will also likely be able to get a car loan, but may be forced to settle for subpar lenders, which means higher interest rates and less-than-ideal terms.
It could take some time to qualify for a mortgage, though you could get an FHA-insured mortgage in a little over a year after filing for Chapter 13 and two years after filing for Chapter 7. Conventional mortgage loans will take more time.