How does bankruptcy effect your credit, and how can you repair your credit after filing for Chapter 7 or Chapter 13 bankruptcy?
What you will discover:
What effect does Chapter 7 bankruptcy have on my credit?
What impact does Chapter 13 bankruptcy have on my credit?
How long would a bankruptcy have a negative influence on my credit?
What should I do to rebuild my credit after a bankruptcy?
There is frequently one overarching fear for anybody contemplating bankruptcy: “What will it do to my credit?”
Although bankruptcy can have a significant impact on your credit score, the severity is determined by a variety of factors, including the type of bankruptcy, the amount of debt to be discharged, the number of late or missed payments already on your credit report, and others. Learn more about how bankruptcy affects your credit and how to repair your credit after you emerge from bankruptcy in the sections below.
Table of Contents
What effect does Chapter 7 bankruptcy have on my credit?
Most unsecured consumer debt is discharged in Chapter 7 bankruptcy, effectively wiping the slate clean. Secured debt, such as vehicle loans and mortgages, may be reaffirmed or repossessed if you no longer desire the item.
In other words, Chapter 7 does not require you to give up your home or car—but if you want to retain them, you must continue to pay for them. In most cases, Chapter 7 cannot be utilized to erase school debts or child support arrears.
Chapter 7 is not open to everyone; you must pass a means test to qualify. If your yearly income is less than the median income in your state, you automatically pass the means test. Those earning more than the median income may still be eligible based on criteria such as total debt burden.
When you file for Chapter 7 bankruptcy, your credit score might drop by 130 to 250 points. This effect will differ depending on whether your credit was good, fair, or poor when you filed for bankruptcy.
If you already have a foreclosure or a few missed payments on your record, your credit score may not suffer as much as if you started the procedure with perfect credit. In any case, your score may be lower after you file.
What impact does Chapter 13 bankruptcy have on my credit?
A Chapter 13 bankruptcy does not result in debt relief. It restructures your debt into a payment plan instead. Chapter 13 may be preferable for people whose income disqualifies them from Chapter 7 or who want to retain property that would otherwise be liquidated.
A Chapter 13 bankruptcy, like a Chapter 7 bankruptcy, may reduce your credit score by 100 points or more.
How long would a bankruptcy have a negative influence on my credit?
The Chapter 7 bankruptcy may stay on your credit record for up to ten years, however the influence on your credit score normally starts to fade much sooner. Most individuals may restore their credit ratings back to pre-bankruptcy levels in five or six years if they are vigilant about restoring their credit.
A Chapter 13 bankruptcy may remain on your credit record for up to seven years after it is filed. Because most Chapter 13 repayment plans last three to five years, your credit can begin to improve as soon as a year or two after you file for bankruptcy.
What should I do to rebuild my credit after a bankruptcy?
When you emerge from bankruptcy, you want to improve your credit score as much as possible. You may do the following steps:
First and foremost, monitor your credit record and fix any inaccuracies.
Second, be sure to pay all payments on schedule. Late payments may have a significant negative impact on your credit score and may imply to lenders that bankruptcy did not resolve your financial issues. If you are having difficulty paying a debt, speak with your lender or creditor about alternative payment arrangements.
Consider acquiring a secured credit card next. It is a fallacy that you must incur debt in order to rehabilitate your credit, but a secured credit card functions similarly to a prepaid debit card. By paying for routine costs using a secured card, you may begin to restore your credit without incurring debt.
Fortunately, the credit rating methodology favors current action over historical activity. Negative factors like as bankruptcy and late payments may have less of an influence over time than more recent smart expenditure.
