Did you know that more than 400,000 people in 2021 alone filed for bankruptcy? Most people know that filing for bankruptcy can do damage to one’s credit score, but how long will bankruptcy stay on your credit report exactly? The answer is not as clear-cut as you would think since there are different types of bankruptcy for individuals to consider.
Chapter 7 and chapter 13 are two most common forms of bankruptcy for individuals. While they are similar, they do have some important differences, especially when it comes to the number of years you have to deal with a bankruptcy on your record.
Keep reading and learn more about what bankruptcy does to your credit score, how long it will stay on your credit report, and what you can do to recover from bankruptcy.
What Does It Mean When You File for Chapter 7 Bankruptcy?
Filing for bankruptcy means that you cannot pay back the debt that you owe and that you need to free yourself from that debt. Some forms of bankruptcy will allow you to do away with all of your debt, while other forms may only allow you to do away with part of it. Bankruptcy is usually the last choice that a person chooses to get free from debt.
It should be your last option since it can negatively affect your credit score. If you have a bad credit score, it will be difficult to find apartments, get loans, credit cards, mortgages, and so on. Before filing for bankruptcy, you may want to start a debt management plan instead.
If that doesn’t work, then bankruptcy may be your best option. A lawyer will help you decide what type of bankruptcy is best for your debt problems. Many people find chapter 7 bankruptcy appealing for several reasons.
For one, this form of bankruptcy allows you to do away with all of your debt. This will allow you to start fresh and you won’t have to worry about dealing with any debt at all. However, you will need to part with certain assets to pay back some of your debt.
Chapter 7: The Details
Whatever debt is not covered by your assets will vanish on its own. After that, you will be debt-free. However, chapter 7 bankruptcy is not as easy as it sounds. Not everyone is eligible for this form of bankruptcy, and you will even need to go through a means test to determine whether or not you are a good candidate for this form of bankruptcy.
The downside of this chapter is that you will end up losing certain assets which will be used to pay off part of your debt. This is not to mention that this form of bankruptcy will stay on your credit report for a very long time, usually as long as 10 years. It can also destroy a high credit score by as much as several hundred points.
While chapter 7 bankruptcy may give you a clean slate, it is still a challenge to deal with. But how does chapter 13 bankruptcy compare?
What You Need To Know About Chapter 13 Bankruptcy
The main difference with chapter 13 bankruptcy is that it does not involve forgiving all of your debts. Instead, you will still have some debt to pay. What is the point of this type of bankruptcy, you might ask, if you still need to pay off your debt?
The point is that this form of bankruptcy makes it much easier to pay off your debt. There are several ways to do this. For example, you may choose a 5-year plan in which you will need to pay off the majority (if not all) of your debt after 5 years.
This form of bankruptcy will organize your debt so that paying it off won’t be such a struggle. More than that, your debt will not be as expensive, so it will be easier to deal with. There is also a 3-year plan if you prefer to pay off your debts faster.
After you pay off everything that you owe, the bankruptcy you filed will finally be discharged. Of course, this will take several years to happen. For that reason, chapter 13 bankruptcy may not be best for those who need immediate financial relief.
Instead, it is best for those who can afford to wait a few years and pay off their debts. Keep in mind that chapter 13 bankruptcy may continue to affect your credit score and will remain on your credit report for as long as 7 years. Whether you choose chapter 7 or chapter 13 bankruptcy, filing for bankruptcy, in general, is obviously not going to be good for your credit score or credit report.
The Consequences of Bankruptcy
The amount that bankruptcy affects your credit score will depend on your original credit score. For example, suppose you have a very high credit score. If you file for bankruptcy, you will lose a significant amount of points from your score, usually around 200.
On the other hand, if your credit score is already low, the score won’t drop all that much. It might only drop by 100 or so. Lenders will also be able to see that you have filed for bankruptcy for many years.
This will deter many lenders from providing you with loans, mortgages, credit cards, and so on. There are some cases in which you might be able to still get a loan or two when you still have bankruptcy on your credit report. However, you likely will need to deal with very high interest rates on those loans.
This makes dealing with financial issues very difficult until your bankruptcy finally falls off of your credit report. However, it is a mistake to believe that your credit score is doomed if you file for bankruptcy. Even though it will stay on your credit report for several years, you can still work on your credit score and improve it until your bankruptcy is finally discharged.
That way, your credit score won’t be at rock bottom. But how should you go about rebuilding your credit score after filing for bankruptcy anyway?
How To Rebuild Your Credit Score After Filing for Bankruptcy
One of the first things you should do to start rebuilding your credit is to get in the habit of checking your credit score very often. Some people are scared to check their credit score after filing for bankruptcy because they are afraid to see how low it has become. However, you shouldn’t let this happen to you.
It is important to know where your credit score rests so you can build off of it from there. Try to check your score once a week or so. That way, you can see how it is changing every week.
Checking it will also enlighten you as to what other issues might be keeping your credit score low. Once you address any additional issues, it will be much easier to build your credit score. Another thing that you should do is to make sure that you pay your bills on time.
If you are late when paying your bills, this will negatively affect your credit score in a big way. This is the last thing you want after filing for bankruptcy. If you do this, your credit score might remain very low for a long time.
What You Need to Know
On the other hand, paying your bills on time is very beneficial for your credit score. As long as you pay off whatever bills you have, your credit score will slowly start to improve. You should also avoid getting into debt again.
This, of course, is easier said than done, but it isn’t impossible. To avoid gaining more debt, you should stick to a solid budget. You should avoid spending more than what you need.
Staying on such a budget will be quite a life change, especially if you’re not used to living on a budget. However, this is an important leap that you will need to take if you care about getting your credit score back on track. You can keep a good budget by separating your wants from your needs.
If you go without certain wants like manicure appointments or desserts, you will end up saving a lot of money and you won’t have to worry about going into debt at all.
How Long Will Bankruptcy Stay on Your Credit Report?
How long will bankruptcy stay on your credit report, you might ask? Chapter 7 bankruptcy will stay on your credit report for 10 years, while chapter 13 bankruptcy will only stay on your report for 7 years. Both forms of bankruptcy damage your credit score, but there are ways in which you can rebuild after filing for bankruptcy.