How Bankruptcy Affects Your Credit Score

When you fail to manage your debts then filing a bankruptcy can be the right decision for you but it can also affect your credit score. It will make it difficult for you to get a loan in the future as bankruptcy means your inability to handle your debts. In this write-up, we are going to briefly discuss different types of bankruptcy and HOW BANKRUPTCY AFFECTS YOUR CREDIT SCORE?


When a borrower files bankruptcy then this legal procedure also involves his creditors. During this process, the borrower has to declare that he is unable to meet the requirements of his creditors and can repay some of their recent debts. In fact, bankruptcy should be filed by a borrower when he has tried all other options including management of debts or consolidation of debts, etc.

It is not easy to file bankruptcy unless you have hired a lawyer to guide you, which type of bankruptcy will be the right for you. There are different types of bankruptcy like:

CHAPTER 7 BANKRUPTCY: In this bankruptcy, the trustee of the court sells some of the assets of the borrower except household furnishings and cars, etc. to repay some or all the loans of the lenders. Upon discharge of this bankruptcy, all the balance you owe will be legally written off from the accounts of the lenders and you are not liable to pay them.

Though it looks like a better option of bankruptcy as it waves off your remaining debts but you can lose some of your important assets and it also shows you eligibility for debts in the future.

CHAPTER 13 BANKRUPTCY: Unlike Chapter 7, this type of bankruptcy allows you to make your debts more affordable by reorganizing them. It allows you to repay some or all of your debts in 3 or 5 years. This bankruptcy will be discharged from your credit history once you repay your debts within the stipulated time. Though it does not look attractive but it can be beneficial for the borrowers in the long run.

CHAPTER 11 BANKRUPTCY: This type of bankruptcy is used when a business fails to clear its debts. In this situation, the business offers a plan to repay its debts by continuing to operate its business. This plan should be approved by the court and the creditors. It can also be opted for in the case of individuals who are not eligible for chapter 13 bankruptcy due to a very high amount of debts. A celebrity or professional athlete can file for this bankruptcy if he/she has lots of high-value assets and properties.

CHAPTER 12 BANKRUPTCY: This bankruptcy is more flexible than Chapter 13 as it allows the fisherman and farmers to get rid of their debts without foreclosure o their property or selling their assets.

CHAPTER 15 BANKRUPTCY: All the cases of international bankruptcy are dealt with in the bankruptcy courts of the US.

CHAPTER 9 BANKRUPTCY: This kind of bankruptcy allows cities, towns, and school districts, etc. to reorganize their debts and repay them.


While determining your credit score, the most important factor is your history to repay your debts. When you file a bankruptcy then it means that you cannot repay your dents as per agreement. Thus filing bankruptcy can severely affect your credit score negatively.

Bankruptcy will be marked in your credit report for up to 10 years from the date of filing a Chapter 7 bankruptcy.

However, the effect of Chapter 13 bankruptcy will remain on your credit score for up to 7 years.

So, your credit report will reflect your bankruptcy, whichever you file for, whenever you will apply for a fresh loan. Until the bankruptcy is not discharged lenders may not approve your application for any loan. However, it can be discharged from your record once the legal process is completed. So it will be hard for you to get any financial help at reasonable terms after filing bankruptcy.


Though you can get rid of your debts by filing bankruptcy but it is not a good option. You can avoid filing bankruptcy and save your credit score by following the tips discussed here under.

CONSOLIDATION OF DEBTS: The consolidation of loans can be a food option for you if you are unable to repay all of your debts as per the agreement but can pay some of them. In this situation, you can be eligible for repaying your current debts by taking a new loan at a lower rate of interest.

PLANS TO MANAGE DEBTS: If debt consolidation is not suitable for you then a credit counseling agency can help you to pay off your debts within 3 or 5 years by making a plan to manage your debts. They will manage your unsecured debts by collecting payments from you and pay on your behalf to the creditors. To make it more affordable for you they can also reduce your interest rates and monthly installments just by paying a reasonable fee throughout the plan.

SETTLEMENT OF DEBTS: This option allows the debtors to negotiate with their creditors to pay a lesser amount than the due amount. The debtor will have to talk to a company that settles such debts. They will negotiate with the creditors on behalf of the debtors after collecting the payment you want to pay your creditors. They will advise you not to make any monthly payment to the creditors until the finalization of the negotiation.

However, debt settlement is an expensive and risky option. Throughout this process, the debt settlement company will charge you upfront and ongoing fees. It can be considered as the last step before bankruptcy because it is as damaging to your credit score as bankruptcy is though its severity is a bit low.


When you want to get relief from your debts then before filing bankruptcy you must think about its long-run effects. You should consider all other alternatives like consolidation of debts, debt management, or settlement of debts before filing bankruptcy. Though all of these options can influence your financial condition and credit score still you should consider their long and short-term effects before using any of them.