Bankruptcy! How does it affect the credit score?
Bankruptcy is a dreaded word. Among several things, it directly impacts your credit score, and that too significantly, and for a long time.
In simple words, bankruptcy is a situation wherein value of individual’s liabilities surpasses that of assets. This, for obvious reasons, is not done by choice, but in most cases – out of compulsion. And it has a number of long-lasting impacts.
Drop in credit score: Filing for bankruptcy typically leads to an immediate drop in your credit score. The severity of the drop depends on various factors, including your credit history before filing.
Remains on report: A bankruptcy record remains on your credit report for a number of years. During this period, it negatively affects borrower’s credit score and makes it difficult to seek new credit or loan.
Limited access to credit: Once an individual files for bankruptcy, lenders are likely to view him/her as a high-risk borrower, thus making it challenging to access new credit lines or loans. And even if credit is approved, it may come with a higher rate of interest and less favourable terms.
Re-establishing credit: While bankruptcy has a key impact on your credit score, it’s not necessarily permanent. With responsible financial behaviour and time, you can start rebuilding your credit.
ALSO READ: Debunking 5 widely-held myths around credit scores
This may involve paying bills on time, keeping credit card balances low, and slowly applying for new credit as your financial situation improves.
Improvement of credit score: Over a period of time, the impact of bankruptcy on credit score falls, particularly if you happen to manage your finances in a responsible fashion.
As the bankruptcy becomes old and you show a positive credit behaviour, your
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