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How Filing Personal Bankruptcy Impacts Credit Scores

Bankruptcy has lasting impacts. One impact is to the debtor's credit report. When an individual files for bankruptcy, under Chapter 7 or 13, his or her creditors report the filing to the credit reporting bureaus. The bankruptcy then remains on the credit report for at least seven years – and possibly up to ten years. The amount of time the bankruptcy remains on the credit report varies by credit reporting bureau, and based on whether the debtor files Chapter 7 or Chapter 13 bankruptcy.

Credit Scores May Decrease or Could Even Rise After Filing Bankruptcy

Beyond the appearance of the bankruptcy filing on a debtor's credit report, a bankruptcy has further impacts on an individual's credit. It is not true that a credit score plummets in every instance in which bankruptcy is filed. There are cases in which a bankruptcy filing may actually improve a debtor's credit score, particularly if the starting point for that debtor's credit score is low.

Debt-to-Income Ratio Breakdown

In order to understand how a bankruptcy filing may actually improve debtor's credit score, it is important and necessary to break down the credit score and its components. A debtor's credit score is comprised of several factors. One of those factors is the debt-to-income ratio. If a person has a great deal of debt and minimal income, the debt-to-income ratio is skewed unfavorably. The unfavorable debt-to-income ratio negatively influences the person's credit score. Upon the filing of bankruptcy, a debtor is able to discharge or wipe out some, often a great deal of, debts. The lower amount of debt in relation to debtor's income, even if unchanged, means that the debt-to-income ratio improves. As a result, the debtor's credit score improves with the more favorable ratio as one of its weighted components.

Issuance of New Credit Also Raises Credit Score

Another way in which debtor is able to raise his or her credit score after filing for bankruptcy protection is through the issuance of new credit. When a debtor obtains new credit and establishes a positive or favorable history of repayment, his or her score increases. Admittedly, this does not apply in all cases, as some debtors are unable to obtain reasonably-priced credit due to their poor credit scores and bankruptcies. Further, the debtor cannot continue to raise her score in perpetuity by taking out an infinite number of new credit lines.