The Impact of Bankruptcy: Huge Drop in Credit Scores
Written by Dongmiao Cui   


Bankruptcy can blow a devastating drop of up to 240 points to your credit score and remains a stain on your credit report for as long as 10 years. In general, it is considered the least desirable option to cope with your personal financial crisis.

How much damage a bankruptcy can cause to the credit score depends on your entire credit profile. According to FICO, a bankruptcy could be reflected as a modest drop (down about 130 points) in a low credit score such as 680. However someone with an excellent credit score of 780 should expect a substantial drop (about 220 points).

How long a bankruptcy stays on your credit report varies according to the type of bankruptcy you file. The negative impact of bankruptcy on your credit score lasts as long as it stays on your credit report, usually for up to ten years. However the negative impact will diminish over time.

Among all types of bankruptcy, Chapter 7 and Chapter 13 are most common types that are filed by individuals. The chart below summarizes the mechanisms and impacts of these two types of bankruptcy.


Chapter 7
 Chapter 13
Duration on Your Credit Report
 Up to 10 years
 Up to 7 years
Proceeding
Liquidation: the debtor received a discharge of many, if not all of debts and loses non-exempt property.
Reorganization: the debtor pays off debt for an affordable amount during a manageable timeframe.
Suitable For
 Person who has an overwhelming amount of debt and whose income is not enough for repayment. Person who has short-term financial problems (due to job loss, sudden illness, etc.) and still has a regular income.
Impact on Credit
 1.) Severly damages credit score;
2.) Makes it extremely difficult to obtain new credit cards or loans for at least one or two years.		 1.) Negatively affects credit score;
2.) However shows willingness to pay off debt and helps refresh credit within a year.

 

 

    

Last Updated on Wednesday, 04 August 2010 13:35