How Long Do Bankruptcies Stay On Your Credit Report?
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The most commonly cited reason people file for bankruptcy is because of the financial hardship they experience from unexpected events, such as job loss and medical problems.
But no matter how often a loss of income may occur or costly medical bills may pile up, it’s an important decision to file for bankruptcy – and one that will have a huge impact on your credit. For this reason, declaring bankruptcy is usually the last effort people make to save their finances when they have exhausted all other options.
According to the FICO Credit Scoring Model website, “A bankruptcy will always be considered a very negative event by your FICO score.” The point to remember is that as long as a bankruptcy filing is on your credit report, your credit score will be affected for years to come.
“Bankruptcies can damage your score and could prevent you from taking additional credit because creditors will be reluctant to lend to someone with a history of non-payment,” Danielle Harrison, certified financial planner at Columbia, told CNBC. , Missouri.
Below, Harrison tells us how long people can expect bankruptcy filings to stay on their credit reports and how they impact your credit score.
How Long Do Bankruptcies Stay On Your Credit Report?
The length of time that a bankruptcy filing stays on your credit report depends on the type of bankruptcy you have filed. We took a look at Chapters 7 and 13, which are the two main types of consumer bankruptcy, and to see how their impacts on your credit score differ.
- Chapter 7 bankruptcy: Also known as liquidation bankruptcy, Chapter 7 is what Harrison calls “outright bankruptcy.” This is the most common form of consumer bankruptcy and usually ends in three to six months. Those who apply for Chapter 7 will no longer be required to repay any unsecured debt (loans that were issued solely on creditworthiness), as personal loans, credit cards and medical bills, but they may have to sell some of their assets to settle secured loans. Chapter 7 bankruptcies stay on consumer credit reports for 10 years from their filing date.
- Chapter 13 bankruptcy: Harrison calls Chapter 13 “employee bankruptcy.” This form of deposit offers a payment plan for those who have the income to pay off their debts, but not necessarily on time. About a third of bankruptcies filed fall under Chapter 13 (the remainder being Chapter 7). Those who deposit are still required to repay their debts, but over a period of three to five years. Chapter 13 bankruptcies stay on consumer credit reports for seven years from their filing date.
Here’s how bankruptcies affect your credit score
While bankruptcies on your credit report will still factor into your credit score for as long as they are there, the impact on your score decreases year by year. So you may see a dramatic drop in your score in the first month immediately following your bankruptcy filing, but by the end of the first year it might carry less weight, and certainly less in subsequent years compared to the first. year.
Your own credit profile will also play a role in the extent to which your credit score is affected when you file for bankruptcy. Similar to how having a higher credit score can If you miss a credit card payment, so too if you file for bankruptcy. According to FICO, a person with a good credit rating may experience a greater drop in their rating when bankruptcy appears on their report than someone with an already poor credit rating.
Estimates we found online from places like Debt.org show how people with different credit scores would be affected by filing for bankruptcy. Someone with a credit score of 780 or higher would lose between 200 and 240 points, while someone with a rating of 680 would lose 130 to 150 points.
Either way, no one really benefits from filing for bankruptcy. It is an option of last resort that sometimes even those with good credit find themselves having.
The same is true if you only have a small number of accounts in your bankruptcy filing. (Note that bankruptcy does not eliminate all debt; “Unforgivable debt” includes student loans, taxes, alimony, and child support.) In this scenario, your bankruptcy filing would have less of a negative impact on your credit score.
How to restore your credit
After declaring bankruptcy, you’ll want to find ways to get a score within a range that will give you better financing options, and that starts with rebuilding your credit.
You may not be able to immediately qualify for the better credit cards, but there are others that apply to people with less than stellar credit.
Secured credit cards require a deposit (usually $ 200) which serves as a credit limit. If you make your credit card payments on time and in full on this new secure card, then you have a better chance of qualifying for an unsecured credit card in the near future.
Capital One® Secured has no annual fees and minimum security deposits of $ 49, $ 99 or $ 200, depending on your creditworthiness. Those who qualify for low deposits of $ 49 or $ 99 will receive a credit limit of $ 200. Cardholders can get a higher credit limit if they make their first five monthly payments on time.
the Citi® Secured Mastercard® is another option with no annual fee. A security deposit of $ 200 is required which would reflect your credit limit. Cardholders can also take advantage of Citi’s Special Entertainment Access, which offers early access to presales and premium seating for concerts and games.
Once you’ve added that new car credit, make sure you pay your monthly bills on time and in full to get you on your way to better credit quickly.
Information about Capital One® Secured was independently collected by CNBC and was not reviewed or provided by the card issuer prior to publication.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.