How Long Does Bankruptcy Stay on Your Credit?
Your credit is far more important than most people realize and when faced with financial problems, it becomes even more apparent. Most people have encountered financial hardship at some point in their lives and coming back from that is not always an easy process. Whether you lost your job or had an injury or simply made mistakes that snowballed out of control, there is always a direction to turn, bankruptcy being one of them.
Bankruptcy: The Last Resort
Bankruptcy is usually a last resort when consulting with a credit counselor or financial advisor, but sometimes it is the only option. Given that situation, we need to be educated on when it’s appropriate to file for bankruptcy and what that means for our credit. Bankruptcy is the route you go down when all others fail. You don’t have the means to pay the delinquent accounts and everything has piled up beyond a manageable point. You have consulted with a credit counselor, DebtQuest has numerous counselors available to assist you on that front, and they have advised on filing bankruptcy. There are a few types, but the two most common are Chapter 7 and Chapter 13 bankruptcy.
Bankruptcy: Chapter 7
Chapter 7 bankruptcy is where you liquidate all your assets in order to repay the debt. This is typically for someone who does not have the financial security or disposable income to pay back some or really any of the debt that is owed. Chapter 7 allows you to have all of your debt essentially cleared, except for debt that is non-dischargeable such as child support or student loans. And when we say all your assets we mean all the nonexempt items. Exempt items are things you need in order to maintain a proper home and job such as clothes, furnishings, and more often than not, a car.
What a state deems exempt is dependent entirely on that state. So if your state decides you don’t need a car to get to your job, and they do have that type of ability, then guess what? Your car is gone and you’re taking the bus to work. The great thing about this option is you get a clean slate, the bad part is watching a trustee sell all your stuff. The other aspect to consider is that this type of bankruptcy typically stays on your report for 10 years and brings down your score significantly more than Chapter 13 because it’s an indication that you didn’t pay off any of the debt. This isn’t to say that you will never ever get a loan again, but understand that when you do apply for a loan in the future expect higher interest rates and fees.
Bankruptcy: Chapter 13
Chapter 13 bankruptcy involves reorganization of your finances and establishment of a repayment plan for the next 3-5 years in order to pay off a portion of your debt. Most people that choose this route have some sort of reliable income at hand in order to repay what is needed. Because you are paying off a portion and not having everything dismissed, this option is more favorable in the eyes of creditors. It only stays on your report for 7 years and usually doesn’t bring down your credit score as much, but that also depends on what you do during that 7 years to improve your score. Right after you file bankruptcy, you will see the most drastic impact on your score, this impact diminishes over time, but “time” is crucial and it will take a lot of patience and hard work before you see that score go back up.
No matter which type of bankruptcy you file it’s important to remember that both options remain on your credit report for 7-10 years. And keep in mind that creditors are not able to collect on any debt while you are in bankruptcy. It is possible to begin repairing your credit while in bankruptcy. In fact, if you can work diligently on your credit during bankruptcy, once it’s lifted off of your credit report you should see a pretty significant increase in your score. There are also plenty of steps you can take after the bankruptcy is discharged, the first being pay everything on time, no late payments! If you are able to demonstrate responsibility with your credit, you are much more likely to get what you need from a borrower.
Monitor your credit throughout the bankruptcy period as well as directly after and ensure there are no discrepancies within the report. If you notice that the bankruptcy has not been removed or discharged after some time, be sure to call the credit bureau agencies to have your report adjusted. If you have further questions about bankruptcy or would like to talk to an agent regarding your financial challenges, feel free to contact DebtQuest today so we can help you through the process.