How Does Bankruptcy Affect Your Credit Score?

When people are in need of financial assistance, they often apply for a loan. From starting a business to buying a home, there are different types of loans that help people fulfill different needs. In return, those people only have to make a small monthly payment.

Sometimes, a business or an individual may go through unexpected financial troubles and become totally unable to pay off those debts. So, what happens then, and how do the creditors recover the amount owed? In such cases, the business or individual may file for bankruptcy.

What is Bankruptcy?

Bankruptcy is a legal action by which the government allows some relief to organizations and individuals who can no longer pay down their debts. Debtors can file for bankruptcy stating that they are financially incapable of paying off their loans. After that, the creditors will receive a notice from the court and a legal proceeding will commence.

If the findings of the court proceeding declare that the debtor is genuinely bankrupt, then the debtor is handed a discharge – a court order that waives some or all of the debtor’s debts and prohibits creditors from making any future claims. Every country has its own regulations on bankruptcy. In the U.S, it is governed by the U.S. Bankruptcy Code.

Different Types of Bankruptcy

The U.S. Bankruptcy Code offers different types of bankruptcy filings for individuals and businesses.

Chapter 7

It can be filed by both individuals and organizations. It allows the debtor to sell/liquidate their non-exempt properties and assets, and then use the profits to pay off creditors. If it is not possible to pay off the entire debt, a certain percentage is paid off and the remaining amount is waived.

Chapter 11

Chapter 11 is designed for businesses, allowing them to keep their assets and continue to operate, as well. If the discharge is granted under this chapter, the total debt amount of the business is readjusted according to their financial status. In such cases, the business will try to increase their profits and pay off a portion of the debt within a certain period.

Chapter 13

Chapter 13 is similar to Chapter 11 but it is designed for individuals. If the individual is earning a stable monthly income, a certain percentage of their debt will be waived and they must pay the rest over a fixed time.

How Does Bankruptcy Affect Your Credit Score?

When filing for bankruptcy, the biggest concern is often how it will affect a debtor’s credit score and financial reputation. However, if you are on the verge of filing for bankruptcy, you may not have many alternatives. Unfortunately, your bankruptcy status will be reflected on your financial report for seven to 10 years. It will also likely negatively impact your credit score.

Your total debt and other financial factors will determine how much your credit score will drop. However, it is still possible to improve your credit score if you make wise financial decisions after bankruptcy, as mentioned below.

  • The first step is to cut off unnecessary expenses and find ways to improve income, such as side gigs and extra part-time jobs.
  • Then apply for smaller loans and credits that you can repay without any financial problems. One of the most viable options is to apply for secured loans if you have any assets to keep as collateral.
  • Make a habit of continuously calculating and monitoring your finances. If you have started applying for smaller credits, then never miss a payment. Avoid multiple loans, and patiently clear each credit one at a time.

Overall, it will take some time to recover the credit score, so it is essential to have patience. With careful planning, it is possible to eventually regain your credit status.


Even though bankruptcy affects the credit score, it is not permanent. It provides immense relief to debtors by freeing them from financial obligations. So, if a business or individual is genuinely under financial distress, they should not hesitate to file for bankruptcy. Contact the attorneys at Lankford & Moore Law today to schedule a consultation and find out if bankruptcy is right for you. 

I realized the true function of a lawyer was to unite parties riven asunder. The lesson was so indelibly burnt into me that a large part of my time during the twenty years of my practice as a lawyer was occupied in bringing about private compromises of hundreds of cases. I lost nothing thereby — not even money, certainly not my soul.

Mahatma Gandhi

Lankford & Moore Law in Downtown Lawrenceville

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