In order to better understand the impact of bankruptcy on your credit score, one must first understand what exactly makes up their credit to begin with. According to MyFico.Com, there are 5 main elements. The largest is your payment history, accounting for 35% of your overall score. Chapter 7 Bankruptcy, followed closely by Chapter 13, are widely considered by lenders to be the worst marks possible on your credit report, so the damage done to your payment history can be significant. Considering the fact that bankruptcy can stay on your credit report for up to 10 years, it best to avoid it if at all possible. Ultimately, the exact number of points drop is unpredictable because there are a number of factors that play into your score. (See section below about what makes up your credit ranking).

If you are in the position where you do not have the income to reasonably afford a debt consolidation program, then the credit impact of bankruptcy is inevitable and ripping off the band aid so to speak is better options than letting the debt sit unresolved, however.

Debt Consolidation & Debt Settlement

There are two types of credit consolidation services and both affect your credit scores in very different ways. The first type of debt consolidation, credit counseling, involves negotiating with credit card companies to lower your interest rates. The creditors generally react to these types of programs in one of two ways: 1) they report to the credit bureaus that the account is enrolled in a debt management plan (DMP) or 2) they report the debt as delinquent until the card holder has made at least 3 consecutive payments, at which point they also start reporting the debt is enrolled in a DMP. According to MyFico.Com, enrollment in a DMP does not directly affect your score. That being said, banks may be wary of lending to you if they see it on your credit report, and having 3 months of past due payments will have damaging consequences to your score.
The other type of debt consolidation, debt settlement, also known as debt negotiation or debt reduction, will most likely have a negative effect on your credit scores. Debt settlement involves negotiating to reduce the credit card debt a consumer owes. During the negotiation process, a creditor considers the debt past due, which will have a very damaging effect on your score (unless your credit is already bad of course).

What’s in Your Score

According to MyFico.Com, your score consists of five factors:

1. Your Payment History (35%) – This refers to account payment information and includes information about bankruptcy filings, charge offs, judgments and late payments.

2. The Amount You Owe (30%) – This refers to the amount you owe on your accounts, the number of accounts you owe, and the proportion of accounts you use (credit utilization).

3. Length of Credit History (15%) – This deals with the amount of time you have had accounts and a credit profile in general. (The older the better).

4. New Credit (10%) – This refers to the number of new accounts taken out and the number of recent credit inquiries. (The less the better).

5. Types of Credit Used (10%) – This deals with the proportion of different types of credit (mortgage, auto, installment loans, revolving credit, etc.).