Bankruptcy is a legal proceeding designed to help people eliminate or reorganize insurmountable debt. But while bankruptcy provides many with the clean slate they need to get back on track, it isn’t without consequences. Bankruptcy can impact your credit score more harshly than any other single financial event.
While filing for bankruptcy doesn’t always result in a lower credit score, it can make it that much more challenging to get new lines of credit in the future. Depending on the type of bankruptcy you file, a bankruptcy will remain on your credit report for a considerable amount of time.
Chapter 7 versus Chapter 13
The chapter of bankruptcy you choose will determine how long it will remain on your consumer credit report. Chapter 7 bankruptcy liquidates all of your non-exempt assets and uses the proceeds to discharge your outstanding debt. Chapter 7 bankruptcies will remain on credit reports for 10 years.
Chapter 13 bankruptcy, or reorganization bankruptcy, requires you to repay a portion of your debts over a three to five-year period. Because you are still making partial payments to pay off debt, Chapter 13 bankruptcies only remain on credit reports for seven years.
Rebuilding credit after bankruptcy
While it’s rare for bankruptcy not to damage your credit score, in many cases, it’s not your poor credit rating that makes it challenging to rebuild your credit. Unfortunately, some lenders will not approve a loan to anyone who has a bankruptcy on their credit report.
But while establishing new lines of credit may indeed be difficult after you file for bankruptcy, it doesn’t mean that it’s impossible. There are many ways to rebuild credit after bankruptcy – including applying for a secured credit card. With consistent and on-time payments, the impact of your bankruptcy will gradually lessen and you will become a better candidate for lenders.
The bottom line
Bankruptcy can hit your credit score hard, but the damage can be undone. By practicing responsible spending habits and staying within your means, you can take full advantage of your fresh financial start.