Bankruptcy may help relieve your debt obligations, but it will impact your credit for years. Bankruptcy is a special legal proceeding you can use to reorganize or get rid of your debt, depending on your financial situation. Bankruptcy can be helpful if you’re overwhelmed with financial commitments, but it could also negatively affect your credit. A bankruptcy will generally stay on your reports for up to 10 years from the date you file. The good news is your credit can gradually heal if you take the right steps.
How bankruptcy appears on your credit reports
Bankruptcy is a type of public record that can be listed on your credit reports. As long as it’s listed on your reports, the bankruptcy may negatively impact your credit. According to the Fair Credit Reporting Act, a Chapter 7 bankruptcy may stay on your reports for 10 years from the date you file. A discharged Chapter 13 bankruptcy typically stays on your reports for seven years from the date you file, but it could remain for up to 10 years if you don’t meet certain conditions. Both types have the same impact on your credit scores. However, it’s possible that a future lender could view one type more favorably than the other. This type of public record may lower your scores significantly. If your credit was healthy before the bankruptcy, it may be hit harder than someone with poor credit. Ultimately, how a bankruptcy affects credit can vary, partially because of the different factors that make up each person’s credit.
How accounts appear on your credit reports
Before filing for bankruptcy, you probably had bills you struggled to keep up with credit cards, medical debt and more. When you include those accounts in a bankruptcy filing, they’ll still be reported on your credit reports. Accounts discharged in bankruptcy can be reported as “discharged” or “included in bankruptcy” with a zero balance. Even though you owe $0 for them, they’ll still appear on your reports. If you apply for credit, lenders may see this note when they check your reports, and they may deny your application. But here’s that good news we promised: Accounts included in a bankruptcy filing won’t be reported as “unpaid” or “past due” anymore, and you may feel relief without those financial burdens. Your credit scores will eventually start rebounding with those positive effects. That’s assuming, of course, you use credit responsibly from here on out.
Credit recovery post-bankruptcy
After filing bankruptcy, you can work to build your credit again but it won’t be instantaneous. Start by making a list of the debts included in your bankruptcy, and check them on your credit reports. After they’re discharged, it may take about two months for the accounts to be updated on your reports. They should be labeled “included in bankruptcy”, “discharged” or similar language. Check your reports every few months for errors. Make sure to check that the negative marks are removed in a timely fashion. In the meantime, consider building credit with a secured credit card. Only take out lines of credit you can afford, and pay back debt as agreed. After several years’ worth of responsible credit behavior, your credit scores can improve. “If someone walks the straight and narrow after bankruptcy,” “it would be possible their scores would be higher now than prior to the bankruptcy.”
How Long Does a Bankruptcy Stay on Your Record?
Although a bankruptcy filing remains on your credit report for up to a decade, the effect on your credit diminishes over time until it drops off your report completely. Chapter 7 bankruptcy is the classic bankruptcy measure for people who have defaulted (that is, failed to pay) their loans. This form of bankruptcy forgives most debts, including:
• Credit card debt
• Medical bills
• Personal loans
Chapter 7 bankruptcy stays as a negative mark on your credit report for 10 years from the date of filing. The bankruptcy also can cause your credit score to drop by as much as 200 points or more. Any debts that were wiped away by filing for Chapter 7 bankruptcy will be included on your credit report. To qualify for Chapter 7 bankruptcy, you must first pass a means test that assesses your income and assets-to-debt ratio. Often, property, cars and other valuables might have to be liquidated in order to pay back as much of the debt as possible but some day-to-day essentials you own might be exempt under the law, such as your house or computers you use for work. Chapter 7 bankruptcy (unfortunately) doesn’t apply to student loans, taxes, criminal fines, alimony or child support. There are some consequences you can’t escape.
How long does Chapter 13 stay on your credit?
Chapter 13 bankruptcy, also known as “wage earners bankruptcy,” is for people who earn too much to qualify for Chapter 7 but not enough to meet creditors’ immediate payment requirements. As with Chapter 7 bankruptcy, filing for Chapter 13 bankruptcy will torpedo your credit score, and the filing will remain on your credit report for seven years. If you need to apply for another loan during that time, you’ll need to file a motion and obtain the court’s permission first. Under Chapter 13 bankruptcy, the court creates a payment plan for you to repay your debt over the span of three to five years. After that span of time, any remaining debts are wiped clean meaning that your creditors may not get the full amount you owe them. Chapter 13 bankruptcy allows you to repay some of your debt while still holding on to your assets, including cars, jewelry and property.
Can you get bankruptcy off your report faster?
What’s interesting is that there’s no minimum amount of time before bankruptcy can be removed from your credit report; 10 years is only the maximum. So get a free credit score and credit report and look really closely for mistakes. If you find any errors with your personal information, debts, creditors, timelines or other information, file a dispute with the credit bureau. Any entries related to your bankruptcy must appear on your credit report correctly, and mistakes could force a credit bureau to remove the bankruptcy from your report. Bankruptcies automatically fall off your credit report after the designated amount of time. If you notice that a bankruptcy doesn’t come off your credit report after the expiration date, you should file a dispute with the credit bureaus.
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
If you discharged debts in bankruptcy, here’s how they should (and should not) be listed on your credit report. In short, yes. Not only will a bankruptcy filing remain on your credit report for seven to ten years, but you can expect information about the debts discharged (forgiven) in bankruptcy to continue to appear on your credit report, too.
Reporting Debts as Discharged in Bankruptcy
While it might be daunting to think about a bankruptcy filing showing up on your credit report for ten years, it might not be as bad as you think. A bankruptcy discharge can help you clean up debt much faster than you’d be able to do yourself. For instance, instead of a delinquent or unpaid debt lingering on your report for years, it will show as being discharged as part of your bankruptcy. In fact, creditors won’t be able to report your debt in a variety of ways that could cause your credit to suffer, such as allowing the obligation to show as:
• currently owed or active
• late or delinquent or outstanding
• charged off
• having a balance due, or
• converted to a new type of debt (re-aged or given new account numbers, for example).
Such reporting labels are often the reason creditors deny applicants credit. In some cases, applicants must pay off such debt as a condition of loan approval. Instead, when you pull your report, each qualifying debt should be reported as:
• having a zero balance, and
• discharged, “included in bankruptcy,” or similar language.
Unfortunately, some creditors don’t update information to the credit reporting agencies. This tactic could be a way to get you to pay up, even though you no longer legally owe the debt. If your credit report shows an improperly labeled discharged debt, you’ll want to take steps to correct the problem.
Checking Credit Report Accuracy after Bankruptcy
You’re entitled to get a free credit report from the three major credit reporting agencies (TransUnion, Equifax, and Experian) each year. That should allow enough time for creditors to report the bankruptcy information. Thoroughly review each listed debt for accuracy. Also watch out for unfamiliar creditor names or debts, as they might be discharged debts that were bought and sold to a third party, but are not accurately reflected as having been discharged. To make changes, follow the instructions under the “Correcting Misreported Discharged Debt” heading. You’ll want to claim each of the remaining two credit reports at three-month intervals. Each time, check to see if the credit report reflects the previously requested changes, and, take steps to correct any remaining inaccurate information. This approach should allow you to clean up your credit report at no cost to you.
Correcting Misreported Discharged Debt
Disputing errors is relatively straightforward. You’ll do so by using the online procedure provided by each of the three major credit reporting agencies. A creditor who repeatedly refuses to report your discharged debt properly might be in violation of the bankruptcy discharge injunction prohibiting creditors from trying to collect on discharged debts. If you take steps to remedy the misreporting, and the creditor (or collector or debt buyer) refuses to fix the error, talk to a bankruptcy attorney. The Fair Credit Reporting Act is the law that requires consumer reporting agencies (also called credit bureaus) to maintain an accurate file of your credit information. Creditors who report your information to the consumer reporting agencies (CRAs) must also be truthful and accurate. The FCRA tells CRAs and your creditors what they can report and how long it can legally show up on your credit report.
How Much Will My Credit Improve Once My Bankruptcy Falls Off?
Bankruptcies fall off personal credit reports after 10 years, after which time a damaged credit score can begin to improve. There’s no way to determine exactly how much your credit score will improve after bankruptcy, because it depends entirely on the decisions you make after the 10-year period. By actively working to improve your credit score, it’s possible to raise it out of the “high-risk” category and eventually into the 700’s or higher, to a maximum score of 850. Rebuilding a credit score requires patience and consistent financial responsibility.
What You Can Expect
After a bankruptcy, you can expect your credit score to be well below 640. Credit scores can range anywhere from 300 to 850, with anything above 700 considered “low risk.” To begin the process of improving your credit score, check your credit report after the bankruptcy falls off. The closer to 300 it is, the more work you will have to do to approach 700. Actively work to boost your score for six months, and then assess how much it has improved. Use that figure to guide your expectations for future improvement. For example, if you find that your score increased 30 points after six months of diligent debt management, you might set a goal of increasing it another 30 points in the next six months. This can give you a target towards which to work, although the exact improvement in any given period is never guaranteed.
Manage Bill Payments
Never miss a bill payment including utilities, rent, mortgage, credit cards or any recurring obligations. Consistently paying bills on time can keep your credit score from temporarily dropping as you work to build it back up. Set up automatic bill payments whenever possible to avoid the risk of forgetting a due date. Create a spreadsheet or chart to regularly track your upcoming payments, and pay bills a few days early whenever possible. Work with your past creditors to establish affordable payment plans for any debts that were not removed by the bankruptcy, such as student loans.
Rebuild Good Debt
Maintain one credit card and one store credit account, but only if you can afford to make the payments. Do not use any form of debt to finance luxury goods or leisure and entertainment products. Do not allow your credit accounts to exceed 30 percent of their total limits at any given time and make larger than minimum monthly payments if possible. It may seem counter-intuitive, but actively using your credit is essential to rebuilding your credit score after a bankruptcy. Establishing a record of responsible borrowing is one of the most important factors in boosting your credit score.
Check Your Credit Report
Check your credit report every few months to be aware of the factors influencing your credit score. Compare each entry in the report to your own financial records to ensure that debt balances and account histories are accurate. Dispute any inaccurate or fraudulent listings in your report as quickly as possible to avoid negative impacts. Personally contact any companies that have legitimately listed defaults or missed payments, and work with them to establish repayment plans to avoid further negative reports.
Work With Your New Creditors
If you ever have to miss a debt payment due to unforeseen financial hardship, contact your creditor long before your next due date. Work with the creditor to establish a future payment arrangement, and ask a service representative or manager to note your account with a “promise to pay.” Specifically request that the creditor not report the missed payment to credit bureaus, and check your credit reports after a few weeks to ensure that it did not.
For many, bankruptcy is a last resort. If you’re considering filing, know the financial and credit implications. Your credit will show a public record of bankruptcy for up to 10 years, and discharged accounts will get a negative mark. You can lessen the effects on your credit by responsibly using credit going forward and making sure your credit reports accurately reflect your situation.
Bankruptcy Attorney Free Consultation
If you have a bankruptcy question, or need to file a bankruptcy case, call Ascent Law now at (801) 676-5506. We want to help you with a chapter 7, chapter 11, chapter 12 or chapter 13 bankruptcy in Utah. Come in or call in for your free initial consultation.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506