Chapter 7 Bankruptcy will stay on your credit report for 10 years. That is also the reason why a lot of people are hesitant to file for bankruptcy, often considering it as a last option, because of its harsh effects on a person’s credit rating.
Working individuals have been protective of their credit score and credit reports, up to the point where some spend on various things just to ensure the inflow and outflow of money. And why not — credit reports and credit scores is a measurement banking and lending firms use to gauge whether an individual can be entrusted with loans.
The common question is, can you bear having a stain on your credit report for a decade?
What is Chapter 7 bankruptcy?
Bankruptcy is a situation wherein a person overwhelmed with debts and other liabilities seeks a reprieve from a court, with the goal of the court intervening for the person and the creditors. What the courts do, depending on the situation, is to discharge several debts from the person who filed bankruptcy in exchange for some of his or her assets.
There are at least six types of bankruptcy in the United States, and these are created to suit an individual applying for one. But the most common are Chapter 7, also called liquidation or straight bankruptcy; and Chapter 13, known as the repayment plan.
These two are called Chapters, in reference to the specific chapter where they are discussed in the US Bankruptcy Code.
Chapter 7 is the most common type of bankruptcy for common consumers in the US. The reason why it is called a liquidation bankruptcy is because after a court accepts your filing of bankruptcy, it will assign a trustee that would take care and sell some of your assets to cover your unpaid loans.
Under this scheme, there are certain assets that the court or its trustee cannot sell or garnish money from — although there is a minimum limit on the value houses, cars, jewelry, personal property, retirement accounts, public benefits, tools, books, which would allow a bankruptcy applicant to live within minimum standards.
Federal limits vary from one state to another, so it might be best to check how much is the limit in your area. It works like this: if the state where one lives declares that you can only protect around $5,000 on a vehicle, then anything in excess of that can be sold to payout your debt.
After two or more months, the court decides whether it should fully remove all existing loans from your care, or whether you still have to pay a part of the original loan — especially if a creditor objects and provides sufficient reason why — like purchasing luxury items while on the brink of bankruptcy.
What Happens After?
If such a deal exists, then why are people not too keen to file bankruptcy when things go south? For starters, it’s not that simple for a court to accept a filing for bankruptcy.
There are certain conditions that must be met first before a bankruptcy is approved: you have to attend certain seminars and financial counseling before one even gets to physically file an application.
And of course, there are a lot of drawbacks. Filing for bankruptcy, especially a Chapter 7 one, takes a huge toll on your credit score and credit report, as it may leave a negative remark.
And Chapter 7 bankruptcy stains on your credit report may last up to 10 years according to the Fair Credit Reporting Act — meaning banks and lending firms might hesitate or even outrightly deny you of any loan or credit card.
To make things worse, some of the companies today would peek at an applicant’s credit report to ensure that they are fit for the job, and have a sound financial record to avoid any untoward incident once they are hired.
In contrast, Chapter 13 bankruptcy only remains on a person’s credit report for 7 years, as this kind of bankruptcy only seeks a reorganization of the debts you have, which forces some to consider debt consolidation instead as it would not have an effect on the credit report.
How bad would the drop in credit score be? According to data analytics company FICO, bankruptcy may pull down a person with a credit score of 680 by 130 to 150 points, while someone with a score of 780 may lose something between 220 and 240 points.
But it’s not only bankruptcy that can affect your credit score: late payments, foreclosures or the seizure of assets, can also contribute too. The good thing however is that credit reports would gradually get better every year that passes — although it still does not help being unable to find sources of money in case of any emergency within that 10-year stretch.
How to Remove Bankruptcy From Credit Reports
Details about your bankruptcy would automatically be removed after 10 years. But what if the bankruptcy mark remains even after you have completed the 10 year period, or worse if you have not been bankrupt at all?
Some experts suggest availing for a credit monitoring service — an agency that would monitor your credit score over time. And if you or they spot any error in your credit report, you may actually contest the bankruptcy using a credit dispute letter.
In some cases, the bankruptcy mark is removed when authorities are unable to specify when and why the bankruptcy after spotting the mistake, a procedural request may be sent to the credit bureaus to fix the issue, with the courts also having a say as to when the bankruptcy was removed.
How to Rebuild Your Credit Score After Bankruptcy
Starting from there, it is important to monitor your credit reports to start a credit rebuilding process, as the bankruptcy mark will eventually go away.
People should take it as a sign to avoid similar situations. Financial coaches suggest getting an adviser who can teach you proper spending mechanisms to have a sound financial stature.
Taking up secured loans or secured credit cards will also rebuild your credit scores, after you remove any bankruptcy remarks on your credit report.
This is possible as unlike unsecured credit which is money provided by the banks or financial institutions, secured credit cards would have to be funded by the user, thus doing away with unsecured debt. A credit card holder’s cash deposits also serve as a safety net for the lending firm, in case one defaults on the payment.
Moving forward, a person who filed and experienced bankruptcy should realize that it is not the end of his or her financial world, and that people may bounce back again from such scenarios. But to assure that no repeat would happen, the affected parties may start operating on a budget to monitor expenses.
Experts also warn against making aliases just to start with a fresh credit report and credit score, as it would further bring down your credit score as companies consider it an unethical activity, slightly similar to fraud. Remember that most banks nowadays tend to look at an individual’s capability to handle his or her finances properly — with records of bankruptcy or none.