What Bankruptcy Does to Your Credit Score

Breaking the Cycle of Debt Gives You a Chance to Make Positive Changes

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Many people worry about filing for bankruptcy in Wisconsin because of what it will do to their credit score. Both Chapter 7 and Chapter 13 bankruptcy remain on your credit report for about ten years. Naturally, creditors don’t love seeing bankruptcy on a credit report, but any actual damage depends largely on your credit score before you filed.

If your credit was already poor due to a high debt-to-asset ratio (meaning the amount of debt is high compared to available credit) and account delinquency, claiming bankruptcy will lower your score.

But since it is already low, there won’t be a drastic drop. However, if you have a good credit score when you claim bankruptcy, you will see a much bigger drop immediately after filing.

Milwaukee area bankruptcy lawyer Steven R. McDonald provides a free consultation and helps you decide if filing bankruptcy is right for you.

What Chapter 7 Bankruptcy Does to Your Credit

Immediately after filing a Chapter 7 bankruptcy you will likely lose the use of all your credit cards, and it may be nearly impossible for you to get a mortgage at that time. The banks and finance companies that do make loans to those who have recently filed a bankruptcy do so at much higher interest rates.

What Chapter 13 Bankruptcy Does to Your Credit

A potential creditor reviewing your credit report may see Chapter 13 bankruptcy more favorably than Chapter 7.  In a Chapter 13 filing, you repay some of or all of your debts over time and therefore, you may be considered a better credit risk than a person who filed Chapter 7.

Is Chapter 7 Bankruptcy Worse for My Credit than Chapter 13?

No matter which type of bankruptcy you file, the effect on your credit score is the same. The potential difference is the way a particular creditor may view each type of bankruptcy when deciding whether to lend you money in the future.

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How to Rebuild Your Credit Score After Bankruptcy

With discipline and a clear strategy, you can rebuild your credit rating, often faster than you might think. The key is to demonstrate to lenders that you are now a responsible borrower. Here is a practical guide to get you started.

1. Monitor Your Credit Reports Diligently

Immediately after your bankruptcy is discharged, obtain copies of your credit reports from all three major bureaus: Equifax, Experian and TransUnion. Your first job is to play defense.

• Check for Accuracy: Make sure all debts included in the bankruptcy are listed with a zero balance or noted as "discharged in bankruptcy."
• Dispute Errors: If you find any accounts that are incorrectly reported as still active or delinquent, dispute them immediately with the credit bureau. Errors can needlessly drag down your score.

2. Open a Secured Credit Card

A secured card is one of the most effective tools for rebuilding credit. It works like a regular credit card, but it requires a cash deposit that acts as your credit limit.

• Why it Works: By making a small deposit (typically $200-$500), you eliminate the risk to the lender. This makes it easy to get approved.
• How to Use It: Use the card for a small, regular purchase each month, like a tank of gas or a streaming subscription, and pay the bill in full and on time every single month. This begins to build a new record of positive payment history.

3. Keep Credit Utilization Low

As you start using your new secured card, never carry a high balance. A good rule of thumb is to keep your balance below 30% of your credit limit. For a card with a $300 limit, this means never having a statement balance over $90. Paying the card off in full each month is even better.

4. Be Patient and Strategic

Your score will not jump 100 points overnight. You are playing the long game. Many of those who follow these steps see significant score improvements within 12 to 24 months after filing. This progress can open the door to better auto loan rates and eventually even qualifying for a mortgage.

Can Claiming Bankruptcy Help Improve My Score?

Bankruptcy is a very effective way to reduce or eliminate many debts. Bankruptcy will never create an immediate improvement in your credit score. 

If you are deeply in debt, continuing to fall behind on payments, or your accounts are in collection, bankruptcy may help you recover more quickly compared to other kinds of debt management strategies. Bankruptcy discharges many types of debt resulting in a fresh start. 

When debt is reduced and you are able to control your finances and begin making on-time loan and credit payments, you can start rebuilding your good credit.

Bankruptcy gives you a chance to break the recurring cycle of debt. Unfortunately, if you continue to default on loans, and make late payments this will result in late fees, more accumulated interest and an increase in your overall debt. If you remain trapped in this cycle, you won’t have the chance to improve your credit score.

Is Filing Bankruptcy Worth It?

The trade-off for bankruptcy is a lasting blemish on your credit report in return for immediate relief from most debt, and the opportunity to improve your financial situation through responsible actions.

In some cases, living with mounting debt, repossessions, harassment from collection agencies, and even lawsuits, can be more difficult and complicated to explain to a future creditor than bankruptcy.

Get a FREE consultation with an experienced lawyer and find out if filing bankruptcy can help your situation.

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