Don’t expect much score change with Chapter 13 discharge

This post originally appeared January 4, 2018 on CreditCards.com as “‘Is bankruptcy discharge a credit scoring factor?

By Barry Paperno

Dear Speaking of Credit,
I was wondering by how many points I might expect to see my credit score increase when my Chapter 13 debt is discharged next month.

The terms of my Chapter 13 agreement allowed for me to open up to $2,000 in new credit, which I did, and my score has improved some.

Unfortunately, I now have two hard inquiries and a short average age of credit that are keeping the score down.

Can I expect to see a decent rise in my score just due to achieving discharge, or is that not really a factor? – Denise

Dear Denise,
As you reach the discharge milestone of your Chapter 13 bankruptcy, you have good reason to breathe a sigh of relief at finally being free of any remaining debt following the required three- or five-year repayment plan.

As usual, the best way to know where your score is going is to understand how it got to where it is.

Fortunately, that direction has been upward, thanks largely to a couple of important sets of scoring calculations working in your favor:

  • Adding new positive credit, as noted in your question.
  • The length of time since your most recent “derogatory” item – something you may or may not already be aware of.

Adding new positive activity to your credit profile
Starting with the opening of some new credit, you have likely helped your score in a couple of ways, with the addition of some positive payment history and available credit to your credit report. Specifically:

  1. If you have any cards or loans with poor payment history, as typically accompanies a bankruptcy, adding some good credit history can help raise your ratio of good to bad accounts.
  2. Adding available revolving credit can lower your utilization percentage, as the same amount of card balances will now make up a lower proportion of your available credit. Credit utilization is the second most important scoring factor, after making on-time payments.

You’ve also correctly noted a couple of potential downsides to adding new credit – hard inquiries and lower average account age.

Yet when focusing on the long run, your score is likely to benefit from the above-noted scoring pluses long after those inquiries stop counting in less than a year from now and as all of your existing credit accounts – both good and bad – continue to age.

How the passing of time influences credit scores
There is another prominent scoring factor working on your behalf, and it has probably been doing so since the date your bankruptcy was filed: the length of time since your most recent derogatory item.

If filed after your last reported late payment or collection, that important score-driving item should be your Chapter 13 bankruptcy.

Most derogatory items, many of which are listed below, have similar scoring impacts when only the severity of the problem and dollar amount are considered.

Where these impacts tend to differ – sometimes widely – is in the length of time since their occurrence.

Recent derogatory items have greater impact than older ones
For this reason, a recent $100 collection can do more damage to your current score than an older bankruptcy discharging thousands of dollars. The lesson here? Don’t let your score rebuilding success lead to complacency and an unpaid bill.

Now that we know that the most recent derogatory item can be your best ally or biggest score killer, if we want to be able to identify which account that is on a credit report, we’ll need to know which date the score uses to mark the starting point for this all-important “length of time since” measurement.

How and when derogatory credit items are reported
Of all the various dates associated with a piece of credit information – date opened or date reported, for example – the dates shown below provide that starting point.

Unfortunately, doing so isn’t always easy, as either the items’ names or their dates tend to vary according to the type of derogatory item and which of the big three credit bureaus is reporting them.

While only a partial list, the following descriptions should apply to most credit reporting formats you’re likely to encounter:

Derogatory items and credit reporting dates

Derogatory item Date
Card or loan account included in bankruptcy, charged-off, or settled Date or last activity, date closed, status date
Collection (agency) account Date assigned, date opened
Public record indicating civil judgment, tax lien, or bankruptcy Date filed

Bankruptcy discharge date’s effect on score
Here is where, in answer to your question, you might be surprised and perhaps disappointed to learn that next month’s discharge is not likely to have any impact on your score – only the date filed.

However, with that date having occurred at least three to five years ago, you can take comfort knowing your score is likely to be higher now than it would be had you filed or incurred another derogatory item more recently.

So, while not expecting any additional score bump from the discharge, as long as you can avoid the problems of the past – late payments and high card balances, for example – you should see your score continue to climb until all evidence of the Chapter 13 bankruptcy has been removed from your credit report when that filing date reaches seven years old.

And from there, the sky – or more likely, a 850-point credit score – is the limit!

One thought on “Don’t expect much score change with Chapter 13 discharge

  1. Sandy

    As usual there is very little I can add to Barry’s excellent advice but I can offer some personal experience.

    I filed for Chapter 7 bankruptcy in 1993 so I know how good it feels to finally have that negative information removed from your credit file.

    I must admit that after my discharge I was still mostly in the dark about proper credit and money management but I did know that I could never again make the same mistakes that caused my bankruptcy.

    I told myself that no matter what I would pay every bill on time every month from now on and My advice to you is to approach the future with that same attitude. It’s not always easy but it can be done.

    Credit repair and management is a journey and not a destination. There is always something new to learn. Be prepared for a few detours along the way but also be determined.

    As for the effects of hard inquiries on scoring in my experience the impact is minimal. Generally I have lost only 5-8 points for an inquiry and after about six months the newness begins to wear off any downward movement caused by inquiries quickly stabilizes.

    In any case FICO formulas remove inquiries from scoring after 12 months although they remain reporting for another year.

    More and more creditors are offering free monthly updated FICO scores of customers. Discover cards has a free service called Discover Scorecard which will give you monthly FICO Transunion 8 scores. It might be worth checking out. It will give you a baseline score and the ability to monitor monthly changes.

    I also urge you to ask Barry any future questions or concerns you might have on your journey. Most of what I know about credit I learned from Barry’s advice. HIs knowledge is amazing.

    I wish you well as you go forward. Keep at it and you’ll do fine.

    Reply

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