Chapter 7 Bankruptcy: Credit Report
One reason many Americans hesitate to file for personal bankruptcy is because of a fear of how bankruptcy will affect their credit reports. While a bankruptcy will remain on your credit report for up to ten years, it won't necessarily prevent you from ever getting loans again or ruin your credit score forever.
The truth is, most people who turn to bankruptcy have bad credit in the first place, and a bankruptcy filing allows them to begin rebuilding credit without being hampered by old debts.
To speak with an attorney about how Chapter 7 bankruptcy might affect your credit report, please complete the below form and arrange a free, no-obligation consultation today.
Your Credit Report & Score
In order to understand the effect a Chapter 7 bankruptcy filing has on your credit, it's important to understand what a credit report is and why it matters. In essence, a credit report is a collection of information about your use of credit and money. Your credit score is a number based on this information.
The following credit report factors affect your credit score:
- Payment history: Timely payments are best and late or missed payments can hurt your credit. Many people who file bankruptcy struggle to pay their bills on time, bringing down their score.
- Age of accounts: Older accounts are better because they show how you can handle money and credit over time. Many people struggling to make ends meet open multiple new accounts to spread their debt burden.
- Debt-to-credit ratio: It's always good to use less than your total available credit – a lot less, in fact. Staying well under your limits on credit cards is one way to make sure your debt-to-credit ratio looks good to potential lenders. Many people who file bankruptcy are near or over the limit on their credit card accounts.
- Diversity of accounts: A range of debt types makes for stronger credit, and having only one type of credit generally makes for weaker credit.
- Account inquiries: Loan applications and credit inquiries have a slight negative effect on your credit.
- Other negative actions: Information about any major financial event, including bankruptcy and foreclosure, would appear on your credit report. Negative actions stay visible on your report for seven to 10 years.
Chapter 7 Bankruptcy's Effect on Your Credit
So what overall effect could bankruptcy have on a person's credit? You can expect the following things from a Chapter 7 filing.
- An initial negative impact: Filing for bankruptcy is considered a "negative" credit action, as it communicates to creditors that you were unable to repay your debts for one reason or another. And, while the bankruptcy itself will remain visible to potential lenders for seven to 10 years, its overall impact on your credit score will diminish over time.
- A forgiveness of debts: When you file for Chapter 7 bankruptcy and receive your debt discharge, you are no longer responsible for paying the debts excused by the court. This means that you can start over financially and carefully build a healthy, punctual payment history.
- A fresh financial start: This phrase is thrown around a lot when bankruptcy is mentioned, but what does it mean for your credit report and score? Quite literally, it means you have a blank slate on which to put only positive credit actions (if you so choose). When filers develop responsible financial habits after a bankruptcy filing and commit to paying their bills in full and on time, they often find that their credit improves in the months and years following bankruptcy.
- More weight placed on newer actions: Another reason bankruptcy's impact on your credit score will decrease with time is that the credit score algorithm values recent financial actions over those in the past, so a few years of on-time payments can communicate at least as much as a several-years-old bankruptcy filing.
Ask a Lawyer for More Details
If you're interested in learning more about how bankruptcy might affect your credit report and credit score, simply connect with a bankruptcy lawyer near you. It's easy - just use the free case review form on this page to get started.