What Does Bankruptcy Do To Your Credit Score

By Mav OT •  Updated: 02/24/24 •  5 min read

Bankruptcy and credit score is a conversation that tends to heighten the curiosity of many individuals. This is because of the idealogy about going bankrupt and its relation with credit score. 

Before we dive into the effect of bankruptcy on your credit score, let us understand the whole deal about bankruptcy and credit score. 

When someone goes into bankruptcy it simply means they are on the low level in their financial life. Once bankruptcy is mentioned it means the individual or institution is not able to pay off it debt

Once you are on credit, you are expected to pay off your debt at the right time. Once it does not go as planned, your credit score starts declining and you may have to file for bankruptcy. 

So what does bankruptcy do to your credit score? The consequences of your credit score after bankruptcy. Let us get deeper into it. 

What does bankruptcy do to your credit score?

In South Africa, where credit plays a huge role in the life of many it is always needed to understand what bankruptcy does to your credit score. When you file for bankruptcy that decision can have a a positive and negative impact on your credit for years. This changes the whole idea of your creditworthiness. 

Filing for bankruptcy can have a big effect on your credit score, and it will usually go down quickly. Different things, like your credit past before you filed for bankruptcy, the type of bankruptcy you file, and how your creditors choose to report it to credit bureaus, can change how the situation affects you.

 In the current situation, it can be hard to get new credit, and any new credit accounts may come with strict terms or high-interest rates.

Lenders are wary of people who have filed for bankruptcy because it makes them think that the person may not be creditworthy in the future. 

In the worst case, your credit score might go down a lot, usually by 100 points or more. It takes hard work and persistence to rebuild your credit after bankruptcy. 

You can slowly raise your credit score over time by developing stable and responsible money habits like paying your bills on time, avoiding carrying high credit card amounts, and using a variety of credit types. Even though it has bad effects, bankruptcy gives people who are deeply in debt a chance to start over and get their finances back on track.

How long does it take for bankruptcy to clear your credit report?

Have you already filed for bankruptcy and wondering how long it may take to clear from your credit report? Do you fear this might have lifetime consequences on your credit?

Well, the entire credit report is forever; as long as your details have been captured it will be attributed to your ID but the bankruptcy process is different.

When you file for bankruptcy, the whole information that is sent to your lenders is “I am broke and I can not pay my debt now”. 

This message may be clear to your lenders but you tell the others that you possess high risk when it comes to getting loans. This makes it hard to obtain a new loan and can take a number of years before starting a new credit.

Once you file for bankruptcy it automatically reflects on your credit history. This information stays on your credit for almost a decade. You could have your credit report cleared after 8 to 10 years where your credit history has not been flagged for serious financial crisis. 

Will I have good credit after bankruptcy?

Bankruptcy stays on your credit for about 8 to 10 years but that does not conclude your financial credit. Although filing for bankruptcy may not be the best option it certainly gives individuals a new opportunity to build a new credit

It is the desire of many to have good credit even without bankruptcy. This can be a bit detrimental but it gives you a new credit to begin your financial journey. 

It is very possible to have good credit after bankruptcy. Although it takes years for bankruptcy to clear, it is not impossible to have good credit after that. 

Who pays for bankruptcies?

Depending on the kind of debt, bankruptcy payment can be shared between the person who files and the individual who is bankrupt. 

When a person files for bankruptcy, they usually have to pay for everything that goes along with it.

The cost of filing for bankruptcy can change based on a number of factors, such as the type of bankruptcy, how complicated the case is, and where the bankruptcy court is located. But the fees to file can be anywhere from a few hundred to a few thousand South African rand.

There are instances where the court may offset your asset to pay off any existing debt. Although it may be a direct payment from the court, the assets are in the individual’s name.