Bankruptcy can affect your credit score more than any other single financial event. While not all bankruptcies actually cause a big drop in credit (in fact, it's possible that your credit score could go up after a bankruptcy), any negative impact makes it harder to acquire credit in the future. A bankruptcy will also appear on your credit report for years after you file, providing a big warning signal to potential lenders about a troubled payment history. Some creditors immediately deny a petition when a bankruptcy is listed on a credit report.
Insolvency and your credit rating
Your FICO credit score is often the most important determinant of whether you receive credit, how much, and at what interest rate. The higher your credit score, the more you can borrow at a lower interest rate. Filing for bankruptcy can cause your credit score to drop dramatically. If a lender is willing to accept your loan application, it will likely be on less favorable terms.
FICO states that your payment history accounts for 35% of your overall credit score. It's possible that a bankruptcy filing won't cause much of a drop if you already have an inconsistent payment history. Another 30% of your score is the total amount of debt you owe, which can actually help bankruptcy discharge. However, it is rare that insolvency will not damage your credit rating.
Bankruptcy and your credit report
The type of bankruptcy you choose to file depends on how long it is listed on your consumer credit report. Chapter 7 and Chapter 11 bankruptcy remain on your credit report for 10 years after you file. Chapter 13 bankruptcies remain on a credit report for seven years after the bankruptcy ends, but Chapter 13 proceedings can take as long as three to five years.
In many cases, it is not your damaged credit score that makes it difficult to obtain credit. Some lenders won't extend credit to anyone with a bankruptcy, regardless of their FICO score. If you are having trouble getting credit after a bankruptcy, it may be a good idea to open a secured credit card.
Applying for a loan after bankruptcy
Because it can be difficult to get a loan after bankruptcy, your personal relationship with a lender can be critical. Have employees or management at a bank, credit union or auto lender who know, trust and how to make it easier to get an application accepted.
You rebuild credit after bankruptcy the same way you build credit before one: over time and with a consistent repayment history. If you believe you can continue to pay an existing debt during and after a bankruptcy, consider recommitting with one of your creditors to help the process of rebuilding your credit score.