How Long Does Bankruptcy Stay on Your Credit Report?
Bankruptcy is a legal process that can stay on your credit report for seven to 10 years. Long after debts have been paid off and discharged, their remnants can still send credit risk “red flags” to future lenders. (Just a heads up: If you’re concerned about bankruptcy, it’s always always best practice to consult a bankruptcy attorney to evaluate your individual situation and options).
Market Watch reported that 452,797 bankruptcy cases were filed in the first seven months of 2019. Not having the proper financial foundation to pay back loans will leave you in debt that can be difficult to recover from, but it’s possible to bounce back.
Bankruptcy laws were created to give those that suffered financial setbacks a chance to start over. There are six types of bankruptcy, but the two most common types are Chapter 7 and Chapter 13. It’s important to understand each type, the application processes involved, and how they will affect you.
How Do Bankruptcies Work?
The type of bankruptcy that you qualify for will determine how your debts are paid back and how much time you have to do so. Income is a primary factor in deciding to file Chapter 7 or Chapter 13.
For example, when filing for Chapter 7, you must meet the appropriate income requirements and pass The Chapter 7 Means Test. This type of bankruptcy involves liquidation of assets to pay back a portion of the debt. On the other hand, Chapter 13 bankruptcy is a reorganization of assets. The debtor has enough income to repay a pre-set amount via monthly payments.
Chapter 7 Bankruptcy
When Chapter 7 bankruptcy is filed, an order called an "automatic stay" is issued. This is an injunction that prevents creditors, collections agencies and government entities from pursuing collections on exempt property. Items include evictions, foreclosures, and contempt of court for alimony or child support.
Chapter 7 is a liquidation of assets that wipes out most of the debtor's general unsecured debts (credit cards and medical bills) without paying back the balances. This type of bankruptcy works best for those with low income or little to no assets. A trustee is assigned to the case that looks at documents and sells off non-exempt property (e.g. expensive vehicles) to pay back the debts. If there’s no property to be sold, then the creditors receive nothing.
Chapter 7 can remain on a credit report for as long as ten years before it drops off. If you ever find yourself back in financial trouble after filing for Chapter 7 bankruptcy, there is an eight-year waiting period from the original filing date to reapply.
Chapter 13 Bankruptcy
Chapter 13 is bankruptcy for people that make enough income to pay back to creditors through specialized monthly payment plans. Considered a "reorganization," you can keep all your assets but you have to pay an equal amount for the non-exempt property (some lenders look a little more favorably upon Chapter 13 bankruptcies because of this).
Individuals that can file for Chapter 7 usually opt for Chapter 13 because of the benefits that come with it:
- Ability to catch up on past missed payments such as mortgages, lien, or car payments.
- Non-discharged debts such as alimony or child support can be paid off in three to five years.
- If an account was delinquent during the bankruptcy, it will be deleted seven years from its original delinquency date.
With Chapter 13, you agree to pay off all debts within a three-to-five-year timeframe. Once paid off, the negative items fall off all credit reports within seven years of the filing date. Bear in mind, declaring bankruptcy does not alter the original delinquency date or extend the time the account remains on the credit report.
How to Raise Your Credit Score After Bankruptcy
Once a bankruptcy is discharged, raising your credit score is the next goal. This task will seem like climbing Mount Fuji, but it's possible to achieve.
Here are a few tips for getting reorganized:
- Review your credit reports when the bankruptcy period is over and make sure that the right accounts were reported.
- Start a budget and review it regularly.
- Create an emergency fund.
- Work on rebuilding your credit with a prepaid or secured card.
How Long Can Bankruptcy Affect Your Credit Score?
Bankruptcy can affect your credit score for some time. Chapter 7 can remain on record for as long as 10 years. Chapter 10 and other forms of bankruptcy are expected to fall off in seven years.
If you're careful, the negative impact will diminish over time. This means that your credit will improve while you're still making payments. Be sure to submit payments in full and on time (we can’t say this often enough. Yes, we know it’s obvious. We’re sorry we keep repeating ourselves).
Can You File for Bankruptcy More Than Once?
You can refile for bankruptcy multiple times, but a discharge can only be obtained after a determined waiting period. If you file for Chapter 7, you must wait eight years from the original date of the first case. You can file for Chapter 13 within four years of completing a Chapter 7 case.
If your original case was Chapter 13, you can refile or apply for Chapter 7 without a waiting period, as long as the original debt was discharged. If the requirements aren't met, then you must wait six years before refiling.
A recent study by Debt.org found that 8 percent of those who filed for bankruptcy had filed at least once before. If the request is accepted, the court requires you to prove why the case will be successful. This is in accordance with The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which prevents fraudulent people from compulsively refiling.
Filing for bankruptcy is a difficult experience and there’s a long road to recovery. Seeking credit education from an advisor is one of the best forms of prevention. If you do find yourself having to file, know that there are resources available to help get you back on track.
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