Bankruptcys Affect on Credit Score

Debt ReliefAs a Plano TX bankruptcy lawyer I often get asked about how bankruptcy affects credit.  Unfortunately this isn’t a simple question.  Credit scores are calculated using complicated algorithms that take into account a lot of different factors.  As a result, making predictions about how quickly credit will recover is tricky.

Filing bankruptcy definitely affects the filer’s credit score but how much and for how long depends on several factors.  First, it depends upon the filer’s credit score at the time of filing.  If they already have a low credit score due to late payments, defaulting on loans, and a large amount of high interest debt, then filing bankruptcy will have little effect on their score.  Their score has already been damaged by prior default and it can’t go much lower.

However, if the filer already has a very low credit score, then filing bankruptcy could improve his credit score within six months to a year.  After filing bankruptcy the debtor no longer owes the unsecured creditors payments according to the original contract.  All payments to the creditors are paid through the bankruptcy.  As a result, the creditor stops reporting late payments to the credit agencies.

How bankruptcy affects a filer’s credit score is largely dependent on what they do after filing.  If the debtor pays his bills on time and does not incur additional debt, then his credit score should improve.  By paying his bills on time he establishes a positive payment history.  The farther the debtor gets from the filing date, the more his credit score improves.  In my experience, a debtor who pays their bills on time after filing can expect their score to improve fifty to one-hundred points the first year.  Once he receives a discharge and his debts are eliminated, his debt to income ratio improves greatly.  As a result, his credit score should improve quickly.