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How Bankruptcy Affects Credit Reports

Posted on by Dawna M. Roberts in LawApril 27, 2022

There are many reasons people acquire debts. Some people fall into debt through irresponsible spending, others through life emergencies, and others through unexpected life changes, such as loss of employment, illness, or natural disaster. There are a few instances where one cannot pay their way out of a debt they have acquired. In these cases, one has the option to file for bankruptcy, among other options to relieve their debt and regain financial freedom. Bankruptcy is a legal process one can use to have debts fully or partially forgiven when they cannot pay them off. Since bankruptcy indicates that someone has been unable to manage a debt, filing for bankruptcy affects their credit record. Some crucial questions may come to mind: How long does bankruptcy stay on your credit record? How do I rebuild credit after bankruptcy?

how long does bankruptcy stay on your credit report

Different Types of Bankruptcy and Their Effect on Credit

There are technically six different kinds of bankruptcy, including:

  • Chapter 7: Debt Liquidation
  • Chapter 13: Debit Reorganization
  • Chapter 11: Business Bankruptcy
  • Chapter 12: Farm and Fishery Bankruptcy
  • Chapter 15: International Debt Bankruptcy
  • Chapter 9: Municipal Bankruptcy

For the average citizen, the only types of bankruptcy you’ll encounter are Chapter 7 and Chapter 13. Filing for these types of bankruptcy involves providing large amounts of personal information, much of which can be found by almost anyone through public search bankruptcy records.

Filing for Bankruptcy

When filing for bankruptcy, there are different factors to consider. How someone files depends on the circumstances of their debts, income, and whether their accounts are personal or commercial. First, Chapter 7 is one option for filing for individual debts by those with lower than average family income. The remaining debt may be forgivable after any available assets have been liquidated and applied to the debt. Secondly, a Chapter 13 bankruptcy claim may be used by those with average or higher than average family income. This option allows the individual to create an agreed-upon payment plan with his debtor to repay the debts over time through a court. Thirdly, a business may file through a Chapter 11 claim, provided the option to reorganize their types of assets and work out a payment plan with their creditors.

How and Where to File

Bankruptcy claims are filed through federal courts. If you are considering finding debt relief through bankruptcy, it is important to know how and where to file. The person filing must make a claim in the district court within the federal district where most of your assets reside or where you spend most of the year living. Once you file in a bankruptcy court within the appropriate district, you can follow the court’s next steps for finding a debt relief solution. After obtaining debt relief, your next steps will include managing bankruptcy on your credit reports and rebuilding credit after bankruptcy.

The Effect of Bankruptcy: How Long Will it Stay on Your Credit Report?

Since bankruptcy remains on your public record for a minimum of seven years after you file, it is essential to keep your future in mind before you file and manage your spending carefully in the years that follow. Your credit score is roughly a reflection of your ability to manage your money and your debts. On the other hand, filing for bankruptcy is an action that displays that you cannot repay one or more of your debts. It follows then that bankruptcy will negatively affect your credit.

How to Rebuild Your Credit After Bankruptcy

For a minimum of seven years after you file, you will have your information in bankruptcy records affecting your credit report. As far as building your credit goes, filing for bankruptcy is not ideal as it will set you back in your progress.

how long does bankruptcy stay on your credit report

  1. One of the first steps in rebuilding your credit after bankruptcy is familiarizing yourself with your credit report. Get to know what raises and lowers your score, when is the best time to pay your monthly balance, and what percentage of interest you should include in each payment to keep down your overall balance. By familiarizing yourself with your credit report, you can also more easily spot any errors in your information and correct them before they affect you in the long term.
  2. Secondly, you will want to develop and practice responsible habits on your credit account: making consistent, timely monthly payments, using your credit only as necessary and not for random spending, keeping lower credit balances, and building a rainy-day savings fund.
  3. Thirdly, you will want to ensure that your credit card is as secure as possible. Do not share your account information unnecessarily to avoid identity theft. Unless you can fully trust someone’s spending judgment, do not let others borrow your card or add anyone else onto your credit account as a cardholder. You will want to monitor your account, keep an eye on your credit score, and verify that your bankruptcy filing is no longer active on your record after the seven to ten year period has expired.
  4. Additionally, credit-building loans are an effective method to regain good credit standing. With these loans, you would be able to take out an amount of money, hold it in a secured savings account, and repay with interest to rebuild your money management reputation to the banks.
  5. Fifthly, using a co-signer on your account could prove helpful in rebuilding your credit. By setting up spending and payment accountability with a co-signer whose credit will also be affected by yours, you can demonstrate your ability to manage money.
  6. Lastly, by becoming a co-signer on someone else’s loan, you may be able to benefit from their good credit. If the person is financially stable and responsible and is willing to have you listed as an authorized co-signer on a loan that they will be paying back, you may be able to raise your credit rating by linking yourself to them.

Alternative to Bankruptcy

There are alternative options to bankruptcy that are available through debt relief programs. Numerous debt relief programs discourage people from filing for bankruptcy before considering their alternatives. Some financial institutions offer debt consolidation loans to assist you in repaying your debts. These loans can be less detrimental to your credit than bankruptcy. Plus, once you’ve paid off this loan, you will not have a mark on your credit report as you would with a bankruptcy claim. The details to consider in this avenue would be the interest rates and requirements of different institutions and loans.

The process of rebuilding credit will take time. You shouldn’t expect to see progress quickly. Consistency is the key to responsible spending, timely payments, and wise stewardship of your accounts. Whether you decide your best option is filing a bankruptcy claim or finding another option for debt relief, rebuilding your credit profile will take time. It is a worthwhile project, and the available options should be able to make this process seem slightly less daunting.

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