If someone applies for bankruptcy would the credit score be reset too?
Your credit score is a reflection of your financial health. If you are applying for bankruptcy, it means your debt is more than all your assets put together. This means your financial health is in a serious condition. Even if the court accepts your bankruptcy petition and clears off your dues, credit rating companies will in all likelihood blacklist you for at least 10 years. This would mean you would not be eligible to take any loans till that period and will have to restore your credit score slowly after the blacklist tenure.
Filing for bankruptcy can have far-reaching consequences for your Credit Score. According to major scoring model FICO, when a person with a Credit Score of 680 files for bankruptcy, he could lose anywhere between 130 and 150 points, while a person with a Credit Score of 780 would lose anywhere between 220 and 240 points. If you already have a low Credit Score, filing for bankruptcy could completely cripple it.
Bankruptcy remains on your Credit Report for a long time. Bankruptcy remains on your Credit Report for up to 10 years. This could certainly hamper your chances of securing further credit. Remember, the higher your Credit Score, the further it could fall. You stand to lose more points after filing for bankruptcy compared to someone with a lower Credit Score filing for the same. Out of all the scenarios, filing for bankruptcy can hurt your Credit Score the most since it affects several credit accounts and reflects negatively on your payment history.
Bankruptcy’s negative effect on your card diminishes with time. Although, after filing for bankruptcy, it will take considerable time for you to regain your credit standing since the bankruptcy information stays in your Credit Report for a decade, its impact on your score, however, diminishes with time. In fact, your score might start to improve shortly after bankruptcy hits your report. This is because, technically, you no longer owe the debts that have been discharged. This could help your Credit Utilisation Ratio (the amount of debts you’re carrying versus your total credit limits).