If your financial situation has you teetering at the brink of desperation, you might be considering bankruptcy as an option. Filing for bankruptcy can give you some financial relief, but what about its lingering effects?
How long does a bankruptcy stay on your credit report? Seven to 10 years, depending on the type you file. Learn about the types of bankruptcy, and what happens to your credit after you file.
Types of bankruptcy
Different types of bankruptcy exist, depending on the financial situation you’re in. For example, individuals or small business owners will likely benefit the most from Chapter 7 or Chapter 13 bankruptcy.
Chapter 11 bankruptcies are often used by larger businesses and corporations, and Chapter 12 bankruptcy is tailored to the needs of farmers and fishermen.
Discharge vs. Dismissal
The goal of many people is to eliminate or discharge their debts via bankruptcy. A discharge prevents creditors from trying to collect after your case is completed. If you choose not to complete the case or don’t meet eligibility requirements, however, your case will be dismissed without a discharge.
Chapter 7
Most types of unsecured debt are discharged in a Chapter 7 bankruptcy, and you’ll often get to hold on to most of your property. But any nonexempt property will likely be sold to satisfy your remaining debts.
To qualify for Chapter 7, your income has to be less than the median in your state, or you’ll have to pass a means test. You’ll also have to fill out a considerable amount of paperwork. But, if you have a simple case, it is possible to avoid hiring an attorney.
Chapter 11
Chapter 11 is a form of reorganization bankruptcy that’s most often used for large businesses and corporations. Individuals who are very wealthy and exceed Chapter 7 and 13 debt and income limits may also be eligible to file.
Chapter 12
Designed for farmers and fisherman, Chapter 12 bankruptcy offers repayment plans that are more flexible than Chapter 13 plans. It also has higher debt limits.
Chapter 13
Repaying your creditors partially or in full is part of a Chapter 13 bankruptcy, so you’ll be tasked with filing a repayment plan with the court. You’ll also need the stability of a regular monthly income.
It’s also almost always necessary to hire an attorney to help you complete a Chapter 13 bankruptcy. No property is liquidated in this arrangement.
For more a breakdown of the steps that occur in bankruptcy, take a look at this video:
Other negative items
Bankruptcies aren’t the only items that can affect your credit. Here are some you need to know about:
Late payments
If you have a history of late payments, both your FICO score and VantageScore will take a hit – but depending on the type of account — the impact will differ. For instance:
- FICO treats all late payments the same, whether it’s your credit card or mortgage.
- VantageScore judges late payments differently – with mortgages carrying a heavier penalty than a credit card or other type of credit.
- VantageScore makes allowances for people affected by natural disasters.
Keep in mind that one 30-day late payment can negatively impact your credit score – and will remain on your credit report for seven years. The later your payment, the greater the damage to your score. And once you cross the line of the 90-day threshold, your credit score and report will indicate that you’re a high-risk borrower. However, if you bring your account current, the impact to your credit score will fade with time.
Charge-offs and Collections
Charge-offs are accounts a creditor gives up on after four to six months of non-payment. The creditor will either write off the account or send it to a collection agency for payment.
If the creditor transfers the debt to a collection agency, it will become a collection account. The charge-off, plus the collection account will remain on your credit report for seven years from the date of the delinquency that resulted in the charge-off.
Both the charge-off and the collection account will cause your credit score to plummet. But you might benefit if you pay off the collections. The latest VantageScore and FICO models exclude collection accounts that are marked as “Paid” when scoring your credit.
Public records
Public records show up on your credit report after specific events like filing for bankruptcy, suffering foreclosure on your home or losing a lawsuit and owing a debt through the court.
But new laws require the credit bureaus to delete any public records that can’t be verified. For example, one verification requirement is that the record must include your name and address, as well as your Social Security number or birthdate.
Tax liens
A tax lien can seriously damage your credit, especially if your bill is $10,000 or more. Tax liens hang out on your credit report for seven years unless you take steps to pay it off and have it removed.
The good news is that tax liens fall under the same new laws as other public records, which means the lien could be erased from your record whether paid or not.
The Consumer Financial Protection Bureau reported that, as of July 1, 2017, about half of all tax liens listed on consumer credit reports had been removed as a result of the new laws.
How long can bankruptcy affect your credit scores?
Chapter 7 bankruptcy stays on your credit report for 10 years because the debts involved are unpaid. All the other types of bankruptcy last for seven years. The effects to your credit score will be evident while the bankruptcy is on your credit report, but the impact will lessen over time.
How to remove bankruptcy from your credit report
It is not possible or necessary to remove bankruptcy records from your credit report. After seven to 10 years from the date of filing, the bankruptcy and any related accounts will automatically fall off of your record.
Check your credit reports
Review your credit reports to make sure there are no errors. If you find errors, dispute them with the credit bureau. Once your bankruptcy is discharged, make sure all related accounts are also discharged and they show a $0 balance. In addition, make sure the bankruptcy is removed from your credit report on the correct date.
The Bottom Line
No matter what, the record of bankruptcy will linger on your credit report for up to 10 years. So if you find yourself in a bankruptcy situation, you’ll just have to wait it out. But that doesn’t mean you can’t start taking steps to monitor your credit now.
Reviewing your credit reports and scores several times a year is an excellent way to keep tabs on the status of your credit. What kinds of things are you doing? Let us know in the comments.
