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How does a Chapter 7 bankruptcy really affect my credit score?

On Behalf of | May 6, 2022 | Chapter 7 Bankruptcy

There are a wide range of factors that will ultimately affect your credit score. Such factors include but are not limited to the following:

  • Your total outstanding debt
  • The types of debt you have, such as student loans, car loans, home loans
  • Your payment history and whether you have had any past due payments

Your FICO score is the most common type that lenders look at and it can range from 300-850. The higher your FICO score, the better a lender sees you as a reliable consumer who is less likely to default on a loan.

People often think their credit score will tank if they file for bankruptcy. This is common but not necessarily true for everyone.

Was your credit score low or high before bankruptcy?

Some consumers struggling to pay off debt still have good credit scores. If you’ve been able to keep up with monthly bill payments but simply cannot sustain the debt load any longer and are looking for relief, then your credit score may not be that bad.

However, most consumers struggling to pay off debt have poor credit scores because of large outstanding credit card balances, continued missed monthly payments, delinquent accounts, and car repossessions among many reasons.

If you already have a low credit score, filing for bankruptcy will not drastically decrease that score. In fact, many people who file Chapter 7 bankruptcy actually see an improvement in their score not long after filing. There are generally two reasons why.

No more unsecured debt

If you file for Chapter 7 bankruptcy, for example, you will see your unsecured debt, like credit card balances and medical bills, wiped out after discharge. Any outstanding balances or delinquent payments that were present on your credit report before filing are now gone.

Debt-to-credit ratio

Another reason involves a change in your debt-to-credit ratio post-bankruptcy discharge. Debt-to-credit ratio is the amount of outstanding debt a person owes verses the amount of credit available to them. The higher the debt and lower the credit, the lower the FICO score.

Typically, before bankruptcy, a consumer has a much higher debt load compared to available credit. After a Chapter 7 bankruptcy discharge, however, the debt amount decreases significantly, given the outstanding unsecured amounts that no longer exist.

A sonsumer’s scenario and credit score post-bankruptcy will always differ based on individual circumstances. However, the bottom line is that bankruptcy doesn’t mean financial ruin forever and it doesn’t necessary kill a person’s FICO score.

Speaking with a qualified bankruptcy attorney who can offer advice on how bankruptcy will affect your score is advised.



Kingcade & Garcia | A Miami Law Firm