How Does Bankruptcy Affect Credit Score?

How Does Bankruptcy Affect Credit Score?

Obviously, bankruptcies always negatively impact your credit report. How big an effect varies? Having more accounts that are included in your bankruptcy will have a bigger impact than if it’s just one car loan or credit card.

Your credit is rated on what’s called a FICO score, which ranges from a perfect score of 850 to a low of 300 based largely on things lenders see on your credit report: your payment history, debt burden, how long you’ve had credit and the types of credit used. How badly bankruptcy damages your score depends on how high it was in the first place.

According to FICO’s published guidelines, someone with a 680 credit score – considered a good score – would drop between 130 and 150 points into the poor range. Likewise, a 780credit score would drop between 220 and 240 points, also into the poor range (below 580).

In each case, qualifying for a mortgage after bankruptcy or buying a car with credit after bankruptcy will prove to be difficult until you can rebuild your credit. That takes time and effort.

The economic fallout from the COVID-19 pandemic looked like it was going to cause a flood of bankruptcy filings in 2020, but just the opposite occurred. Filings dropped from 774,940 cases in 2019 to only 544,463 in 2020, a 29.7% decline. That was the lowest since 1986.

Still, half a million filings represent a lot of financial pain and hardship and the pain could grow. Bankruptcy filings tend to escalate gradually after an economic downturn. Following the Great Recession of 2008, bankruptcy filings increased for the next two years, peaking in 2010 at 1.5 million.

If you’ve been forced into bankruptcy, you are far from alone. More than 500,000 Americans declared bankruptcy in 2020, some because of the fallout in the economy from the COVID-19 pandemic, others for the usual difficulty of managing personal finances.

One thing they all have in common: They want to get this financial red flag off their credit reports as soon as possible.

Can this be done? Eventually. But, it’s neither quick nor easy.

Assuming that the bankruptcy is legitimate rather than the result of identity theft or a clerical error, it will remain on your credit report for seven to 10 years. However, desirable it may seem to be, getting bankruptcy off your credit report shouldn’t be the overriding concern.

Think of it as one part of repairing your credit and recovering from the financial damage related to it.


While insolvency is a situation which arises due to inability to pay off the debts due to insufficient assets, bankruptcy is a situation wherein application is made to an authority declaring insolvency and seeking to be declared as bankrupt, which will continue until discharge. ♠ The term insolvency is used for both individuals and organizations. For individuals, it is known as bankruptcy and for corporate it is called corporate insolvency. Both refer to a situation when an individual or company are not able to pay the debt in present or near future and the value of assets held by them are less than liability. ♠ Insolvency in this Code is regarded as a “state” where assets are insufficient to meet the liabilities. If untreated, insolvency will lead to bankruptcy for non-corporate and liquidation of corporate. ♠ While insolvency is a situation which arises due to inability to pay off the debts due to insufficient assets, bankruptcy is a situation wherein application is made to an authority declaring insolvency and seeking to be declared as bankrupt, which will continue until discharge. ♠ From the above, it is evident that insolvency is a state and bankruptcy is a conclusion. A bankrupt would be a conclusive insolvent whereas all insolvencies will not lead to bankruptcies. Typically insolvency situations have two options – resolution and recovery or liquidation.

How to Rebuild Credit After Bankruptcy

There are different ways to improve your credit score after bankruptcy. These include:

  • Don’t make the same mistakes that led to your bankruptcy. Stick to a budget and try to save money to build an emergency fund.
  • Although you don’t want to immediately accrue new debt, you’ll want to strategically show that you’re responsible. Pay all your bills on time. Things like rent and utility payments can be added to your credit report if you ask your landlord or utility company.
  • Get a secured loan. Local banks and credit unions are willing to lend money that’s secured by a deposit into a savings account because the risk is low for them. The gain is high for you, if you make on-time payments for the loan. By reporting your timely payments to the credit bureaus, the banks or credit unions will help you improve your FICO score.
  • Get a secured credit card, which is backed by a deposit that you pay upfront. The credit limit on a secured card usually is equal to the amount of the deposit you paid. Such cards may have annual fees and high interest rates, but as long as you make on-time payments on it, you can use it to improve your credit and become eligible for a better, unsecured card. Make sure they report your timely payments to the credit bureaus. Of course, never put more on the card than you can pay off by the end of the month.
  • As your score rises, you may be able to apply for a car loan or mortgage.
  • Check your credit report on the date that bankruptcy should be removed to be sure the job was done. Also, when reviewing your credit report, dispute any errors you find. Every point counts. You can order your free credit report from each of the three credit reporting companies once a year, and also request a free credit report from Experian at any time.
  • If you need additional help, consider credit counselling. Non-profit credit counsellors are experts at helping consumers deal effectively with debt.

Whatever you do, don’t lose hope. Bankruptcy is a difficult process, but if you handle it right, it’s a step toward solvency. Look at it as a restart and get to work.