The most commonly cited reason people declare bankruptcy is because of the financial hardship they experience from unexpected events, like a job loss and medical issues.
But regardless of how frequent an income loss can happen or expensive medical bills can add up, it's a big decision to file for bankruptcy — and one that will hugely impact your credit. For this reason, declaring bankruptcy is usually people's last effort to save their finances when they've exhausted all other options.
According to credit scoring model FICO's website, "A bankruptcy will always be considered a very negative event by your FICO Score." The general takeaway is that as long as a bankruptcy filing is listed on your credit report, your credit score will be affected by it for years to come.
"Bankruptcies can damage your score and could prohibit you from taking on additional credit as creditors will be wary of lending to someone who has a history of nonpayment," Danielle Harrison, a certified financial planner in Columbia, Missouri, tells CNBC Select.
Below, we hear from Harrison on how long people can expect bankruptcy filings to stay on their credit reports and explain their impact on your credit score.
The length of time that a bankruptcy filing stays on your credit report depends on what type of bankruptcy you filed. We took a look at Chapter 7 and Chapter 13, which are the two main types of consumer bankruptcies, and to see how their impacts on your credit score differ.
While bankruptcies on your credit report will always get factored into your credit score for as long as they are on there, the impact on your score lessens with each year that passes. So, you may see a dramatic drop in your score in the first month immediately following your bankruptcy filing, but by the end of the first year it could have less weight, and certainly less in later years compared to year one.
Your own credit profile will also play a part in how much your credit score is affected when you declare bankruptcy. Similar to how having a higher credit score can ding your more points if you miss a credit card payment, so, too, is the case if you file for bankruptcy. According to FICO, someone with good credit may experience a bigger drop in their score when a bankruptcy appears on their report than someone with an already poor credit score.
Estimates we found online from places like Debt.org show how people with different credit scores would be impacted by a bankruptcy filing. Someone with a credit score of 780 or above would be dinged between 200 and 240 points, while someone with a 680 score would lose 130 to 150 points.
Whatever the case, no one really benefits from filing for bankruptcy. It's an option of last resort that sometimes even those with good credit find themselves making.
The same applies if you only have a small number of accounts in your bankruptcy filing. (Note that bankruptcy doesn't eliminate all debt; "unforgivable debt" includes student loans, taxes, alimony and child support.) In this scenario, your bankruptcy filing would have less of a negative impact on your credit score.
After declaring bankruptcy, you'll want to look at ways you can earn a score in a range that will qualify you for better financing options — and that begins with rebuilding your credit.
You may not be able to immediately qualify for the best credit cards, but there are others that apply to people with less-than-stellar credit.
Secured credit cards require a deposit (usually $200) that acts as your credit limit. If you make your credit card payments on time and in full on this new secured card, you then have a greater chance at qualifying for an unsecured credit card in the near future.
The Capital One® Secured has no annual fee and minimum security deposits of $49, $99 or $200, based on your creditworthiness. Those who qualify for the low $49 or $99 deposits will receive a $200 credit limit. Cardholders can obtain a higher credit limit if they make their first five monthly payments on time.
The Citi® Secured Mastercard® is another option with no annual fee. There is a $200 security deposit required, which would mirror your credit limit. Cardholders can also take advantage of Citi's special entertainment access, which provides early access to presales and premium seating for concerts and games.
Once you add this new credit car, make sure you pay your monthly bills on time and in full to quickly work your way toward better credit.
Information about the Capital One® Secured and Citi® Secured Mastercard® has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.