How Bankruptcy Affects Your Credit

As a general rule, it is best to consider bankruptcy as the least desirable option available to you when your finances have gotten out of control. However, if your financial situation has been going downhill for an extended period of time, your credit standing is probably so bad that filing for bankruptcy really won’t do much to make it worse, with one exception: A bankruptcy remains on your credit report for ten (10) long years. Nonetheless, creditors will know that once you file bankruptcy, you cannot do so again for 7 years.

When your finances reach the point where you consider them terminal, bankruptcy will provide relief in the sense that it will halt the never-ending dunning letters and telephone calls from creditors and collection agencies. The effect that it will have on your credit standing depends in part on which type of bankruptcy you file.

Chapter 13 Bankruptcy credit issues

Chapter 13 bankruptcy, also referred to as reorganization, does not discharge your obligations. What it does do, is permit you to ‘work out’ a plan for paying them off in amounts and timeframes that you can manage. Chapter 13 is designed to provide a solution for people who have suffered a short-term financial problem due to a job loss, sudden catastrophic illness, etc. If you still have a regular income and wish to avoid the stigma of a Chapter 7, a Chapter 13 filing can give you the time you need to correct your problem. This filing will combine an automatic ‘stay’ with three to five years to catch up on your backlog while you keep current on your ongoing monthly expenses. You will have to complete a U.S. Trustee-approved credit counseling briefing with your petition in order to have the court place a stay or hold on a foreclosure or repossessions. Your creditors will receive a notice from the court that stops their collection efforts and dunning in approximately fifteen (15) days after you file your petition.

A Chapter 13 bankruptcy will have a negative effect on your credit report, but it does show your willingness to pay your debts rather than to discharge them. That should help you obtain new credit within a year or so.

Chapter 7 Bankruptcy credit issues

From a credit standpoint, Chapter 7 adjudication is the blackest mark you can have on your credit standing. While it absolves you of the debts you owe (except for monies owed in child support & alimony or unpaid income taxes), it makes obtaining new loans or credit cards extremely unlikely for at least a year or two and perhaps longer. There are some exceptions. Federal student loans, for example, are not granted based upon credit history or income. In fact, federal law prohibits discriminating against applicants based upon these factors.

Getting New Consumer Credit Will Be Difficult After Either Bankruptcy

You may be able to obtain a home loan beginning two years after being discharged in Chapter 7, or as soon as one year after filing a Chapter 13. FHA and VA-insured mortgage loans can be had as early as one year after filing either bankruptcy petition. Normal consumer credit, such as revolving charge accounts or credit cards, will be much more difficult to secure, as they are determined by the credit standards of the individual lenders.

Delete Bankruptcy from your credit report (legally!)

If you’re credit has some issues, and you want results a little faster, you might check out a service like Lexington Law. It’s not going to be free, but I’ve seen results that are pretty amazing. They have even been able to get Bankruptcies removed from people’s credit. I’m planning on trying them out in a few months.

I'm 300K in debt. Gulp. I'm 24 and day traded away a fortune. Now I'm trying to crawl back to zero. Why not subscribe to my RSS feed and join me on this journey. You can also subscribe via e-mail. I appreciate tips and feedback! ~ DebtKid