If you are facing a tough decision with your finances—namely, bankruptcy—it’s important to understand the aftermath. What happens to your credit when you file bankruptcy? How do you move forward following a bankruptcy?
What Happens To Your Credit When You File Bankruptcy?
First things first: Don’t panic.
Many people consider bankruptcy when looking to relieve debt stress. However, the damage may not be as bad as you think. You also have options to rebuild your credit.
A Chapter 7 bankruptcy involves the collection as well as the liquidation of non-exempt assets. The non-exempt assets’ proceeds are then distributed to your unsecured creditors. This is generally a faster process than a Chapter 13 bankruptcy—which calls for a 3-year to 5-year repayment plan. There are a few differences when looking at these two types of bankruptcy, including what happens to your credit when you file bankruptcy.
Both Chapter 7 and Chapter 13 cases will be reported under the public record section of your credit report. This same section of your credit report is where court cases involving creditor judgments are listed.
A bankruptcy case will be reported in the public records section for 7-10 years, depending on the bankruptcy case filed. The creditors listed in your bankruptcy case (who are later discharged in the bankruptcy) will still show up on your credit report. These accounts will be labeled “Included in Bankruptcy.”
- Chapter 13 bankruptcy shows up for 7 years
- The bankruptcy will be deleted from the public records section 7 years from the filing date of the bankruptcy case
- Chapter 7 bankruptcy shows up for 10 years
- The bankruptcy will then undergo deletion from the public records section 10 years from the filing date of the bankruptcy case
For many of those who are suffering from financial troubles, your credit has probably already taken a hit from late payments, judgments, high balances as well as charge-offs. If this resembles your current situation, then your credit score might only be slightly lower, the exact same, or potentially a little bit higher. Bankruptcy can sometimes provide you and your credit report with a fresh start.
As previously noted, your bankruptcy filing will be listed – and this occurs in place of judgments or high balances. Thus, it can help equalize your credit report.
During a Chapter 13 bankruptcy case, you’ll get the chance to boost your credit score with every on-time monthly payment you make while the case is pending. If you can file a Chapter 7 case, you should be able to begin working to rebuild your credit in just a matter of months due to the typically short duration of such bankruptcy cases.
Still wondering what happens to your credit when you file bankruptcy? Take a look at Chapter 7 bankruptcies.
Chapter 7 Bankruptcy
A Chapter 7 bankruptcy will remain on your credit report for up to ten years. Furthermore, because any debts associated with this type of bankruptcy are discharged within just a few months of filing, they should fall off the report a couple of years before the bankruptcy itself. Generally, discharged debt comes off your credit report after seven years.
Essentially, as the items on your report associated with the bankruptcy grow older, they will have less and less of an impact on your credit score. This might also speak to the timeliness of filing for bankruptcy (as opposed to allowing collections accounts to linger and then filing later on).
FURTHER READING ON BANKRUPTCY:
How Long Do Derogatory Items Stay On Your Credit Report?
Credit Repair After Bankruptcy
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