Many sources will scream to the rooftop that your credit score will plummet after bankruptcy. That may even be true for some people—it depends on your credit score before bankruptcy and when you filed it.
But for most debtors, the reality of credit score shifts is somewhat different than the prevailing narrative. Their credit score goes up after bankruptcy, not down.
To understand what’s going on here, you have to understand the stages most borrowers go through before they finally decide to visit with a bankruptcy attorney.
- The borrower starts struggling to keep up with payments.
- Eventually, many of the borrower’s debts end up in collections.
- Those debts that aren’t in collections may now have three or more late payments.
- If the borrower carries many debts from many sources, each collection item and missed payments continue to drag their credit score down.
Many borrowers see their credit scores plunge into the 300s long before they allow themselves to see the inside of a bankruptcy attorney’s office.
What happens after discharge?
All those collection items and late payment records go away, leaving only the single public record of bankruptcy in its place. A score in the 300s shoots right back up into the 500s. It may instantly enter the 580s. While 580 is not a “good” credit score, it is a “fair” one.
It will be sufficient for many apartment rentals and for obtaining at least a secured credit card that you can use to start rebuilding credit. In fact, many borrowers are surprised when they’re bombarded with credit offers just days after their discharge. While it’s important to be careful about those offers (the terms are usually dismal), they prove that you can turn your financial life around after bankruptcy.
Getting a credit score above 600 is usually possible with a few years of focused work. Some individuals have even brought their scores into the 800s. After about two years, the importance of your bankruptcy diminishes, and it’s even possible to obtain a home mortgage again.
Will it be easy? No. But you can make it work.
Most borrowers wait far too long to file for bankruptcy. The lending industry has worked hard to spew mountains of propaganda to assure everyone and their brothers that bankruptcy is horrible, bad, a last resort, and guaranteed to tank your credit.
In reality, bankruptcy could be the fresh start you need to repair your credit once and for all.