How long does bankruptcy stay on your credit report?

February 5, 2015 | 0

The events of the past few years have severely impacted the US economy and resulted in numerous bankruptcies being filed. This has affected the lives of thousands and millions of Americans. A bankruptcy is considered as one of the most damaging things that can occur to anyone’s credit rating and report. The damage can be extensive and occur in many different ways.

The legal record of a bankruptcy

Legal records, also referred to as public records, on a credit report can include varied aspects like court judgments, tax liens, and bankruptcies. When a bankruptcy is filed, it can stay on the credit report for 7 years or more, according to the type of bankruptcy that is being filed.

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  • A Chapter 7 bankruptcy may stay on the credit report for a minimum of 10 years from the date of filing it. Under this bankruptcy chapter, the affected person need not repay any of the debts present in the filing report.
  • A Chapter 13 bankruptcy may stay on the credit report for a minimum of 7 years from the date of filing it. Under this bankruptcy chapter, you need to pay at least some part of the debt. Hence, it is delisted a few years sooner.

Sometimes, bankruptcy is thought of as an easy way to get rid of bad debt. But most discover later on that it is an incorrect thought process. Even though people who file a bankruptcy become free from their credit commitments of the past, such people will face many difficulties in getting new credit, possibly for many years to come.

bankruptcy credit report

The effect of bankruptcy on the accounts

When a bankruptcy is filed, the credit rating does not bear the brunt of it from the legal record. Instead the biggest hit comes from the effect that a bankruptcy has on the accounts.

For instance:

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  • The calculation of the ‘score’ is done by adding a penalty for having an excessive number of scores with extreme delinquencies.
  • People with fewer than 2 open credit cards will not be able to avail of the bonus points that usually get added to the credit score.
  • You may also lose the additional points that you could have gained for having an excellent average balance remaining on open credit cards.
  • Even though you have an open mortgage account that is more than good enough, you may not get the extra points which usually could have gotten added to the credit score.

The effect of bankruptcy on your ability to get credit

Credit scores and reports were conceptualized to help lenders in determining the kind of borrowers who were most likely to fulfill their financial commitments, as well as to allow deserving candidates easy access to credit in their hour of need. When a person files for bankruptcy, it indicates a failure on part of the said person to meet some or all of his/her financial obligations. This can subsequently result in serious damage to their credit score.

It may be, and is, possible to quickly recover from the financial repercussions of filing a bankruptcy via hard work and discipline. However, its impact on the credit score will most likely remain for a minimum of 7 years. During this period of time, the chances of getting new credit accounts or loans are minimal, if not completely absent. Even if a person can get the loan, it is most likely to be approved along with high rates of interest and additional fees. Also, it is very rare that the type of credit that you get is the kind of credit that you actually wanted.

In a difficult economy, as is the case currently, a lot of lenders will never provide credit till the time the bankruptcy filing is present on the credit report. This in turn means that people need to wait for 7 or more years to be able to receive the kind of credit required by them, or even any type of credit.

It is also an unfortunate truth that the percentage of people filing a bankruptcy for a second time is quite high. Therefore, lenders consider people with bankruptcy records in the past as high risk debtors who may file another bankruptcy at a later date. Due to such high probability of not getting repaid, lenders are usually very hesitant to grant loans or credit to people with past bankruptcy records.

When the economy is strong, lenders are not that circumspect about taking a risk. However, in a struggling economy, as is the case now, lenders are most likely to completely avoid taking any risk.

It may be noted that a majority of negative information in the credit report has to be removed after 7 years. However, with regards to bankruptcy, the Fair Credit Reporting Act permits such a record to remain listed on the credit report for up to 10 years. It is the responsibility of the credit bureaus to remove bankruptcy information after the time limit to report it is over.

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