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How does bankruptcy affect a personal credit score?

Most large lenders, such as banks, credit unions and similar organizations, use a number called a "credit score" to decide whether to loan money to a particular person. A high credit score makes it easy to borrow money, whereas a low credit score makes borrowing burdensome and often impossible. People in eastern Tennessee often wonder how filing a bankruptcy petition will affect a credit score.

Filing a bankruptcy petition can have a devastating effect on a person's credit score. The exact effect will depend upon each person's individual financial situation, but the mere act of filing a Chapter 11 petition can cause a 200 point drop in a credit score of 700 (which is an excellent rating) or between 130 and 150 points in a credit score under 680. A Chapter 7 filing will diminish a person's credit score for about 10 years, whereas a Chapter 11 filing will affect a credit score for about five years.

The good news is that the negative impact of a bankruptcy on a credit score diminishes over time. The bankruptcy will reduce the amount of unpaid debts and, in a Chapter 13, the amount necessary each month to keep the accounts current. After obtaining a bankruptcy discharge, the debtor can rebuild a credit score by opening a small line of credit and making each and every payment on time. If any installment payments remain after a Chapter 13 proceeding, making those payments on time will also help rebuild a credit score.

Anyone seeking to rebuild a credit score after bankruptcy should pay close attention to how payments are reported every month by the major credit reporting agencies (Equifax, TransUnion and Experian). All errors should be called to the attention of the credit reporting agency in question. An attorney experienced dealing with credit issues can offer significant assistance if a reporting agency refuses to admit a mistake.

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