When consumers have more debt than savings and are faced with mounting bills and saddled with other ones such as student loans, filing for bankruptcy might be the only option. However, if you are considering filing for bankruptcy it's important to consider the long-term consequences.
One of these consequences is the impact bankruptcy can have on your credit. Depending on how you file, the bankruptcy could remain on your credit report for seven or as long as 10 years. People who have exhausted all their options and can not get another job or increase their income are faced with few choices.
Filing for bankruptcy often remains the only viable choice for some individuals. People who are considering filing for bankruptcy should first consult with a non-profit credit counseling agency or attorney to see if it is the right choice for them.
The law states that consumers must also seek pre-filing bankruptcy counseling. The counseling helps people learn about several options other than bankruptcy, such as settling with creditors, entering into a debt management plan or simply not paying the debt.
Consumers Can Seek Chapter 7 or Chapter 13 Bankruptcy
There are two types of bankruptcy that consumers can choose if their financial situation warrants it: Chapter 7 or Chapter 13 bankruptcy. The type of bankruptcy you choose will ultimately determine how long it remains on your credit report.
Chapter 7 bankruptcy essentially means any unsecured debt will be wiped out (or discharged) with certain limits and restrictions. The other type is Chapter 13 Bankruptcy, which calls for people to continue paying their debt for several years and afterward, a portion of that debt is discharged. (Chapter 11 bankruptcy, which you may also have heard of, is only meant for businesses.)
How Long Bankruptcy Remains on a Credit Report
Bankruptcies will remain on a credit report for seven to 10 years, depending on if Chapter 7 or Chapter 13 was filed (as opposed to the date the debts were actually discharged).
- Chapter 13 bankruptcy is deleted from your credit report seven years from the filing date.
- Chapter 7 bankruptcy is deleted 10 years from the filing date.
Consumers do not have to contact a credit agency to have their bankruptcy removed. Whether it is a Chapter 7 or 13 bankruptcy, they are automatically removed after seven or 10 years.
How Are Delinquent Accounts Reported on Credit Reports?
People who file for either type of bankruptcy may have accounts which have been delinquent for several months or even longer. The individual delinquent accounts are deleted seven years from the original delinquency date.
The delinquency date is the date the account first became delinquent. Filing for either kind of bankruptcy does not alter the original delinquency date nor does it extend the time the account remains on the credit report.
In most instances, since the account was delinquent before it was included in the Chapter 7 or Chapter 13 bankruptcy, it is likely to be deleted before the bankruptcy public record.
How Bankruptcy Affects Your Credit
Filing for bankruptcy makes it challenging to receive credit cards or lower interest rates because lenders will consider you risky. These consequences could occur immediately, affecting any short-term needs such as getting affordable interest rates or approval from prime lenders.
Rebuilding your credit as soon as possible is paramount. One way to increase your credit score is to pay all your bills on time each month, creating and sticking to a budget and not incurring more debt.
You should also avoid overuse of credit cards and failing to pay balances in full each month. Having a good credit score gives consumers access to more types of loans and lower interest rates, which helps them pay off their debts sooner.
New Bankruptcy Laws
The bankruptcy law changed in 2005, making it more difficult for individuals to file for Chapter 7 bankruptcy and have all their unsecured debt discharged. Government-backed and private student loans are rarely included in either type of bankruptcy.
The "not dischargeable" rule also applies for court-ordered alimony, court-ordered child support, reaffirmed debt, federal tax liens for taxes owed to the U.S. government, government fines or penalties and court fines and penalties.
What Documents Do You Need to File Bankruptcy?
Before filing for bankruptcy, consumers should collect several financial documents including:
- Tax Returns
- Bank Statements
- Paycheck Stubs
- Debt Statements
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on April 12, 2018, and has been updated.