Bankruptcies: How They Can Affect Your Credit

While everything you do with credit becomes a part of your credit history, some actions can have a greater impact on your credit status than others. Bankruptcy, for example, can significantly impact your credit. If you’re unable to pay your debts, you may wonder if declaring bankruptcy will provide you with debt relief. As with any step that can have such a major effect on your credit, it’s important to learn all you can about bankruptcy before you act.

A bankruptcy is a matter of public record, along with tax liens and court judgments. Depending on the type of bankruptcy, the information can remain on your credit report for up to 10 years from the date it was filed. Generally, consumers pursue one of two types of bankruptcy proceedings:

  • Chapter 13 Bankruptcy – When you file for Chapter 13 bankruptcy, you will be expected to repay at least part of your debt over a three- to five-year repayment program. A court trustee must approve the repayment plan, but you’ll be able to keep your property. The bankruptcy will appear on your credit report for seven years after the debt is discharged.
  • Chapter 7 Bankruptcy – Commonly referred to as “straight bankruptcy,” Chapter 7 requires debtors to sell property – although you may be allowed to keep certain exempt property – to repay as much of their debt as possible. The balance of the debt is then discharged. A Chapter 7 bankruptcy will appear on your credit report for 10 years.

What Filing for Bankruptcy Doesn’t Do

All bankruptcy proceedings have a few things in common:

  • They are handled by the courts. Once you file, you’ll no longer be negotiating with your creditors. It will be up to the bankruptcy court to determine how things will proceed.
  • You’ll have to go through credit counseling before you’re allowed to file for bankruptcy.
  • Bankruptcy deals with specific debts, and not necessarily all your debt. For example, bankruptcy can’t discharge a lien against your house, child support or alimony obligations.
  • In some situations, bankruptcy may be able to discharge student loan debt or income tax liens, but the standards are very high.

Any bankruptcy will appear on your credit report as a negative item, and such factors can adversely influence your credit score. Bankruptcy is a major decision, so be sure you research all your options, understand how bankruptcy works and get professional advice before you proceed.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.