Filing for bankruptcy is a drastic step for your finances and can have large effects on your credit score. The status of your credit health is only one of many factors to think about when you're contemplating or going through a bankruptcy, but the effects are worth considering.
Bankruptcy usually has an enormous effect on a credit report. Here we'll briefly describe the different types of bankruptcy before diving into the credit repercussions.
What is bankruptcy?
Bankruptcy is a special legal proceeding available under federal law in which debtors may seek certain forms of relief from their debt obligations. Each type of bankruptcy case has its own eligibility requirements and procedures, which can be very complicated. If you're thinking about filing or you're in the process of dealing with bankruptcy, it's important to consult a qualified attorney, credit counselor or similar expert who can help advise you on your individual circumstances.
These are a few types of bankruptcy proceedings more commonly pursued by individuals:
- Chapter 7 bankruptcy is the most common type of bankruptcy proceeding. Chapter 7 of the Bankruptcy Code addresses "liquidation" bankruptcy proceedings, which typically involve the sale of the debtor's "non-exempt" property and the distribution of the proceeds to creditors.
- Chapter 11 bankruptcy provides generally for "reorganization" proceedings. Usually, Chapter 11 relief is sought by corporations or partnerships, but a Chapter 11 case may also be filed by individuals.
- Chapter 13 bankruptcy is the second most common type of proceeding for individuals. Chapter 13 of the Bankruptcy Code allows for the adjustment of debts by eligible individuals. Under a Chapter 13 proceeding, eligible debtors may be allowed to keep property and pay debts over time under a repayment plan.
Please keep in mind these are only general descriptions. For more detailed information about the bankruptcy process and approved credit counseling resources that could help you deal with a bankruptcy, here are a few useful links:
- Bankruptcy Basics (United States Courts)
- Bankruptcy Glossary (United States Courts)
- Filing for Bankruptcy: What to Know (Federal Trade Commission)
- Lists of Credit Counseling Agencies and Debtor Education Providers (United States Trustee Program)
How will bankruptcy affect my credit report?
Bankruptcies are reported on your credit report as public records, which generally have a significant negative impact on your credit health. A reported bankruptcy public record will also typically remain on your report for around seven to ten years, depending on the type of bankruptcy proceeding involved.
Recovering from Bankruptcy
Nursing your credit back to health after a bankruptcy can be a long, slow process. One of the most immediate and simple steps you can take is to review your credit reports to ensure that your bankruptcy is being properly reported. If the status of your debts is not being accurately reported following a bankruptcy proceeding, you can file a dispute directly with the credit bureaus to address these mistakes.
For many, bankruptcy is a financial last resort. If you've recently had a bankruptcy added to your credit report or if you're thinking about filing in the near future, stay aware of both the financial and credit implications, and make sure that what eventually appears on your credit report accurately reflects your circumstances.
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