How Does Bankruptcy Affect Your Credit Score

Bankruptcy is a legal declaration that an individual or business cannot repay outstanding debts. It may be used as a last resort after other debt management or restructuring options fail. Filing for bankruptcy allows a major drop in your credit score because it shows severe financial distress. Your score reduces sharply after you file it. This information stays on your credit report for up to 10 years. A credit report is your recorded borrowing and repayment history. Lenders study this report before offering new credit. The long reporting period and the sharp score drop make borrowing difficult during these years. Bankruptcy follows the legal process under the Insolvency and Bankruptcy Code (IBC) 2016.

Key Takeaways:

• Bankruptcy creates a strong negative impact on your credit score

• Your credit score drops sharply after you file for bankruptcy

• Bankruptcy stays on your credit report for up to 10 years

• A credit report is your recorded borrowing and repayment history

• Lenders may decline your loan or credit card applications after bankruptcy

• Approved loans may have higher interest rates and strict conditions

• Rebuilding your credit score takes a long period

• Low credit utilisation and timely payments support score improvement

• Credit utilisation is the share of used credit against your total limit

• Bankruptcy cannot be removed before the 10-year reporting period ends

• You can dispute reporting errors with credit bureaus if they appear incorrect

• Bankruptcy is a legal process under the Insolvency and Bankruptcy Code (IBC) 2016

Credit score and bankruptcy are closely linked. Bankruptcy affects your credit score for many years. This section explains how they connect and what it means for your finances.

Credit Score

If you are wondering what a credit score is, it is a three-digit number that shows your creditworthiness. It reflects your repayment history and borrowing behaviour.

Bankruptcy

Bankruptcy is a legal process to manage overwhelming debt. It helps you address debts when repayments become impossible.

Bankruptcy laws differ by type, with each chapter specifying ways to address financial distress based on your situation. For individuals, the most common forms are Chapter 7 and Chapter 13 bankruptcies. These vary in how debts are handled—some require repaying creditors over time, while others focus on liquidating assets to settle debts more quickly. Understanding these differences can clarify the appropriate path for managing financial recovery.

Chapter 7 bankruptcy applies when you cannot repay debts due to limited income or assets. It focuses on clearing debts through asset liquidation under legal supervision. Here are the details:

• Your assets are sold to repay creditors

• Liquidation means converting property or possessions into money for debt repayment

• Remaining eligible debts are discharged after the process

• This process clears most debts but affects your credit score significantly

Chapter 13 bankruptcy applies when you have regular income but cannot repay debts fully. It allows debt repayment over time instead of asset sale. Here are the details:

• A structured repayment plan is created to clear your debts

• A repayment plan is a schedule to pay debts over a fixed period

• You can keep your assets while repaying debts gradually

• Your credit score is impacted, but less severely than in Chapter 7

Here are the key points on how credit scores and bankruptcy are linked and how much bankruptcy hurts your credit:

• Bankruptcy directly lowers your credit score

• Your score drops sharply after you file for bankruptcy

• Bankruptcy stays on your credit report for up to 10 years

• A credit report is your recorded borrowing and repayment history

• Lenders may reject your loan or credit card applications after bankruptcy

• Approved loans may have higher interest rates and strict terms

• Large loans like home or car loans become harder to get

• Credit utilisation is the share of used credit against your total limit

• Payment history and low credit utilisation help improve your score over time

• Errors in your credit report can be disputed with credit bureaus

Filing for bankruptcy has a major effect on your credit score. The impact occurs immediately and continues in the long term. Both affect your ability to access credit.

Immediate Impact On CIBIL Score

Your credit score drops sharply the moment you file for bankruptcy. Lenders view this as a signal of financial difficulty.

• Your credit score takes a significant drop immediately after filing

• Bankruptcy is recorded on your credit report, your financial history record

• The drop can be around 200 points or more, depending on debts

• Lenders may hesitate to approve new loans or credit cards

• Approved loans may have higher interest rates and stricter terms

Long-Term Impact On CIBIL Score

Bankruptcy stays on your credit report for years, affecting borrowing ability. Long-term effects depend on your repayment and credit use.

• Bankruptcy remains on your credit report for up to 10 years

• It serves as a warning to lenders, limiting access to large loans

• Payment history and credit utilisation become important to rebuild your score

• Credit utilisation is the share of used credit compared to total limit

• Errors in your credit report can be disputed with credit bureaus

• Responsible use of secured credit helps slowly improve your score over time

• Once removed after 10 years, your score can increase if financial behaviour is consistent

Bankruptcy stays on your credit report for up to 10 years in India. This negative mark is visible to lenders during this period. It acts as a warning and makes getting new loans or credit cards harder. The impact on your credit score lasts as long as the bankruptcy record remains. After 10 years, the record is removed, and your credit profile reflects only current financial behaviour.

Although bankruptcy impacts your credit significantly, it’s not the end of the road. With consistent efforts, you can rebuild your credit over time. Here’s how:

• Start With Secured Credit

Secured credit products let you borrow within a deposit-backed limit. They are recorded on your credit report and reflect repayment behaviour.

• Timely Payments

Paying bills, EMIs, and remaining debts on time is recorded in your payment history. On-time payments help gradually improve your credit score.

• Maintain Low Credit Utilisation

Credit utilisation measures how much of your available credit you use. Keeping this ratio low positively affects your credit score.

• Avoid Unnecessary Credit Applications

Each new credit application triggers a hard inquiry on your credit report. Frequent applications can temporarily lower your score.

• Monitor Your Credit Report

Regularly reviewing your credit report helps identify errors or inaccuracies. Correcting mistakes ensures accurate reporting and scoring.

Bankruptcy under the Insolvency and Bankruptcy Code (IBC) 2016 starts when you or creditors file an insolvency application. The process involves review, planning, and possible liquidation of assets.

• File An Application

You or your creditors can file an application to start the insolvency process. Individuals apply to the Debt Recovery Tribunal (DRT), while companies apply to the National Company Law Tribunal (NCLT).

• NCLT Admits The Petition

The NCLT reviews the application and admits it if legal requirements are met. The date of admission is called the Insolvency Commencement Date (ICD).

• Appointment Of The IRP

An Interim Resolution Professional (IRP) is appointed to manage your assets and oversee the process. The IRP documents financial status and prepares for the next steps.

• Formation Of A Committee

A creditors committee is formed to supervise the resolution process. The committee approves key decisions regarding debt repayment.

• Submission Of Plans

Resolution plans are submitted by the IRP or other parties. The plans outline how debts will be managed or repaid.

• Approval

The NCLT approves the resolution plan. If no plan succeeds, the process may proceed to bankruptcy and liquidation.

Bankruptcy can be addressed through different legal processes depending on your debt and assets. Each process defines the steps to manage or repay debts.

• Fresh Start Process

This is for individuals with minimal debt and limited assets. It allows debt relief without full bankruptcy proceedings.

• Insolvency Resolution Process

This process helps individuals, firms, or businesses restructure debts. A resolution plan is drafted and approved by creditors.

• Bankruptcy Process

This occurs if resolution fails. Assets are liquidated to repay creditors, and remaining debts are discharged.

Your CIBIL score reflects your creditworthiness. Multiple factors determine how lenders assess your ability to repay loans and manage credit.

• Payment History: Timely repayment of EMIs, credit card dues, and loans boosts your score. Missed or late payments reduce it.
• Credit Utilisation: The ratio of used credit to available credit. High usage can lower your score.
• Credit Mix: A balanced mix of secured (loans backed by assets) and unsecured credit (personal loans, credit cards) strengthens your profile.
• Credit Age: Longer credit history provides more data for scoring. New accounts may lower your average age.
• Hard Inquiries: Each loan or credit application triggers a hard inquiry. Multiple recent inquiries can reduce your score.
• Outstanding Debt: High unpaid balances on loans or cards can negatively impact your creditworthiness.
• Account Accuracy: Incorrect account status, discrepancies, or reporting errors can lower your score.