Bankruptcy And Your Credit Report

The Bankruptcy Institute 1.37 million people filled for bankruptcy in 2011. If you have filed bankruptcy due to unpaid bills and expenses which you cannot afford to pay, you are not alone. Many people today have resorted to this, in order to get creditors and collection agencies off of their backs. It sometimes is the best option, when it is impossible to meet financial obligations. And, while it is not the BEST option when things are good, it may be the ONLY option when things are bad.

That being said, it is important to know your rights and what happens in a bankruptcy regarding your credit report. By having the knowledge of how this status affects your credit, you need to know how bankruptcies are reported to credit agencies, how others view this kind of reporting, and how it will affect your overall ability to get credit in the future, and to restore your rating to its original state.

Let’s face it. You didn’t get to this point overnight, and you will not get out of it overnight either. But here is some information regarding the different types of bankruptcy and how each can affect your credit report.

Chapter 7 & 13 Bankruptcies

Chapter 7 is the most common type of bankruptcy allowed to consumers by law, and also has the most far-reaching credit results. Since Chapter 7 bankruptcy involves total removal of most debts,it  is more difficult to recover from and may take more time to win back the respect of creditors and credit bureaus due to your lack of completing the debt. Oftentimes Chapter 7 (also called “straight bankruptcy”) may also involve selling some of your possessions to pay debts off and creditors are banned from calling you. See our article on harassing debt collectors here.

Chapter 7 will stay on your credit report for 7-10 years. It will be listed as a “straight bankruptcy.” You will likely not be able to apply for any new credit nor will you be approved for large credit purchases, such as a home or car for this period of time. Also, nowadays, when employers use your credit record as a contingency of employment at times, it may prohibit you from securing a new job or starting a business until the bankruptcy is removed.

With Chapter 13 bankruptcy (also known as a “Wage Earners Plan“), some of your debt is released. But you may still be held responsible for the amount that you can afford to pay (determined by the court) . This type of bankruptcy will remain on your credit report for 7-10 years, the same as Chapter 7. However, a Chapter 13 bankruptcy looks less sinister on your report than does Chapter 7, due to the fact that it is often noted as a “slow pay” account, rather than a “cancelled” or charged off account with credit agencies.

Remember that it is the accumulation of debt-to-income in which debt overcomes income that harms you on your credit report. The more debt you have, compared to your income, the more of a risk you are viewed as by credit reporting agencies, creditors, and banks.

A Positive View- A Fresh Start

If you are forced to declare either Chapter 7 or Chapter 13 bankruptcy, there are options which are available to you. Your best course of action is to consult with a skilled bankruptcy attorney who understands your rights and the law concerning bankruptcy. Attorneys may even be able to remove your bankruptcy from your credit report after only 3 years or so, if you have been paying your debts on time.

One way to view bankruptcy is to see it as a time for a fresh start, a time to revamp and look at your spending habits, your income, and your finances and change the way you do things. Many events you cannot control. That’s how you got into the bankruptcy in the first place. But you can do something about the future. Remember just because you FEEL that things are hopeless does not mean that they are.