How much will bankruptcy hurt your credit scores?

DrowningA reader whose credit scores have already been badly damaged by late payments and charge-offs had a question: How much more would her scores drop if she filed for bankruptcy?

For years the creators of the leading FICO credit scoring formula were a bit vague about the answer, saying only that a bankruptcy filing is “the single worst thing” that can happen to your scores.

Three years ago, though, the FICO folks provided a peek into how the formula treats a bankruptcy filing as well as other major negatives. You’ll find the post that covers that topic on FICO’s Banking Analytics blog. I go into more detail about this in my book “Your Credit Score,” but you’ll see that, indeed, the impact of a bankruptcy is bigger than that of other negatives. As with other black marks, a bankruptcy hurts already battered scores proportionately less than it does those with higher scores. But in the three examples given (people who started with scores of 680, 720 and 780), everyone ended up in the low to middle 500s. Not a great place to be. Futhermore, it takes years for credit scores to recover. To get back to “good” credit of 720 and above will take 7 to 10 years.

So does that alone mean people should avoid bankruptcy? Heavens, no. Bankruptcy puts a legal end to collection efforts and the ongoing damage unpaid debts can do to your scores. If you can get your act together and start using credit responsibly after a bankruptcy filing, you can start to rebuild your scores immediately. If you continue to struggle with un-payable debt, you may never be able to rehabilitate your credit.

Obviously, if you can pay your debts, you should. Many people who can’t wind up doing themselves more damage, and throwing good money after bad, in vain struggles to pay their bills. If you’re falling behind and can’t see how you’ll catch up, you’d be smart to at least talk to a bankruptcy attorney about your options.




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  1. Goalie Coach says

    I am sorry I do not agree with the reasons you give for bankruptcy. Unless there were medical situations no one should just dump their debt because it is just not worth paying… Debt does not appear like magic any more than litter just suddenly appears… Someone pays for that debt… You get fired from your job and continue to live like you did what is that? It is fraud. People go to jail for fraud.. I speak from experience.. I am no one special I sure don’t write money blogs but I never lost my house or had a car repossessed.. I lived ok and raised 3 children with one going to college… How? By working 3 jobs at times. Being frugal and paying attention to addressing the bills we did have… The American dream is what you make it not what TV says it is.. When you are given things you don’t appreciate them like you do when you EARN them… No one owes anyone happiness or financial freedom.. and you should not get a mulligan for being selfish or stupid… Deal with life and grow up…

    • Liz Weston says

      I had similar views but after more than a decade of researching bankruptcy issues, it’s become clear to me that most people seek bankruptcy protection far too late. Yes, some people should have been smarter, but most don’t go into debt expecting to walk away from it, and by the time they realize they’re in trouble there’s no good alternative other than bankruptcy. Continuing to struggle with un-payable debt, as many do, is pointless. Bankruptcy laws exist to give overburdened people and companies a fresh start.

  2. Goalie,
    Most people do not intend to walk away from debt. Sometimes there is no other way out
    A person may have great credit in fact we did for years
    We purchased two brand new dodge pickups on credit card because the rates were so much better than a bank.
    We had cards that ran from 0 to 7% interest
    Some of these cards we would pay off and then run back up to high amounts
    Never gave it a thought
    The fanny and fredy fiasco hit
    My very good credit cards went from the 0 to 7 to a straight 29 %
    We still handled them it was struggle. Then the minimum payments started going up each month. One card at 29% was running 65.00 a month when I quit paying on it 6 months latter it was at 275 a month.
    Another card we had was at 125 it went to 450 in a 3 month period
    It appeared if I sent more than the minimum payment they would raise the payment by nearly that much
    It did not matter that we had been card holders for 15 years with outstanding credit and that we had payed them off over and over .
    The rates would not get lowered
    I had two card companies told me the best advice they could give was quit paying and file bankruptcy
    In six months our payments (keep in mind I always paid two payments at a time on each bill ) went from roughly 375 a month to over 1800 a month just for minimum payments which was more than double and still at 29%
    We finally had no choice as I had depleted my 401k trying to keep everyone payed
    You have been fortunate that there has never been a disaster come along that has cost you.
    We saw an attorney and was told to wait and if actually sued then file bankruptcy
    Doctors/hospitals are not beyond being hard nose either. You miss a payment and it goes over 30 days they send it to a collection agency .Even if you pay all of it off with a first notice they will not remove it from your credit .It shows as a late pay turned over to collections
    Bankruptcy is a last resort as you could end up paying more than what you would by not filing. We would have to pay like 1200 a month which was not of any help and that was for 5 years
    The wife and I had good jobs so we were stuck with a high payback which really would not help us
    People really need to look at the options as bankruptcy does not always turn out to be the best