Bankruptcy and Your Credit Report

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Bankruptcy and Your Credit Report

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:

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.

Bottom Line

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.

About the Author:Mike Goldstein is a Content Writer at Credit Karma. Since joining the team in June 2013, he's been delivering the financial know-how on the daily. When away from work, you can find Mike watching hockey, Twittering for hours and frequenting trivia nights.

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Top Contributor
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Perhaps the most underdiscussed part of BK is on how it will actually affect your credit report and scores.  Most likely, your score is already in the tank if you are thinking BK.  Its common to have a pre BK score in the mid 500s.  What people want to know is how do I increase my score 200+ points in as little time as possible.  And, boy, there is a lot of poor, misguided advice out there. 

First of all, your situation leading into the BK that will have the greatest impact on how fast and how much you can increase your score after BK.  Clearly, someone who was being very bad right up to the day they filed will not experience the same recovery as someone who just made a couple mistakes several years before filing.  Realize, BK does not wipe away the history.  Most people are the first.  Usually 3-4 judgments, numerous collections, 30-, 60-, and 90-day late payments galore, etc., and all happening in that 12 months just before filing.  Well, if this is you, its gonna be a while before your scores recover.  Likely 5-6 years.  If you just have a few black marks and/or they occured 4-7 years prior to filing BK, they your recovry will be fast.  Likely 2-3 years.  Basically, that bad stuff needs to clear off the credit report to attain a great score.  Only time will clear it.  aving said that, you should plan your recovery accordingly.  Either way, though, the basic techniques are the same.  It is only your timeline that should be adjusted. 

In either case, you got to think long-term.  Dont waste your time trying to get anything in the first 12 months after BK.  Only the worst of the worst will approve you for their products.  And you dont want to get credit products that are non-sustainable.  These are things like high-interest credit cards with huge annual fees, pretty much any secured credit card, etc.  These products are simply undesirable and you will end up closing them, which is not good for the long-term health of your credit.  Only get products that you know will work for you in the long-term and keep, basically, forever.  During that 12-24 month period post BK, try to get as many good credit cards as you can, and perhaps an auto loan.  6-8 cards is plenty and well matched with an auto loan.  About 18-24 months from that point is when you will really start to see your score climb.  This is because a lot of your old, bad history is dropping off your credit, your new, good credit is becoming established, the inquiries from the 12-24 application spree are dropping off, etc.  After that, you should be well set in postive motion.  But, and it should go without saying, you have got to be perfect with your payments post BK.  Also, keep the utilization ratio below 30% (personally, I pay in full every month), and get regular limit increase without hard inquiry.  If they insist on a hard inquiry, then decline.  It is common to see 150+ point gains with this technique.  As long as you are realistic with your credit goals, you should be a happy camper at this point.

My case:  560 score prior to BK.  3 years later and Im hovering around 750.  I had fewer black marks and most everything was 3-4 years prior to BK.

Reply by
JcMagic55

4 Contributions
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Helpful to 5 out of 6 people

Thanks for the details of recovery from BK. 

Reply by
Iloveschnauzers

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Helpful to 21 out of 24 people

Was just wondering, I filed in October 2008 and was discharged in Jan. of 2013.  How long before this black mark falls off my credit report?  I was hoping it would fall off this year or next.  Like in January of 2016.  That will have been 8 years after I filed.

4 Contributions
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Helpful to 13 out of 14 people

Wondering when I can expect a Ch 7 BK to fall off my credit report? I'm looking fir specifics. Is it different for each credit bureau? I live in MASS.

5 Contributions
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Helpful to 2 out of 2 people

I am alone on this credit thing my husband maxed out most of the credit cards, he gambled alot. He passed away in 2009, left me with a bunch of debt. I am finding my way slow but, I am getting there.

2 Contributions
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Helpful to 5 out of 7 people

Just like the person above me said it has to do with how much income you have. Before I file for bankruptcy my income was less than 20,000 a year. I could not get any credit card. When my husband  purchased a house I still could not get any credit cards although my husband paid all of the expenses and my paycheck was free for me to use as I please. This has always been the case. In 2005, my husband put me on the mortgage and a year later we found out that we were victims of a predatory lender HSBC. When my husband and I both lost our jobs I file for bankruptcy chapter 7 my bankruptcy was discharged in 2010. I was told that after I file for bankruptcy that my credit score would go up because I have very little debt to begin with(just the 150,000 house now worth 30,000) my credit score never went up if anything it went down. 5 years later I'm still trying to establish credit no one will give me credit. There's all kinds of errors on my credit report that I have been working to fix 3 years now. I have several accounts that I have paid on time but they never report anything. The one that I have for an auto loan they report all of my good payments and my credit score still has not gone up. I went to my bank to get a secure credit card with a 300 dollar balance and I was told no! I believe that these credit bureaus and companies  set you up to fail. It's amazing that all of these companies who have filed for multiple bankruptcies still manage to have better credit then consumers. 

1 Contribution
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Helpful to 1 out of 1 people

How long does a chapter 7 stay on your report?  I applied for a consolidation loan from my bank and was told everything looked fine and the only thing stopping approval was the bankruptcy which I filed in 2009.

2 Contributions
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Helpful to 5 out of 6 people

I have a relatively good credit score (702) and not much debt EXCEPT for enormous hospital bills (around $200,000 due to a motorcycle accident two years ago.  I'm a retired Viet Nam vet with a fixed income and in no way can I pay this debt.  The collection agencies will not work with me at all.  What's my course of action before I file for bankruptcy?

8 Contributions
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Helpful to 3 out of 4 people

My husband and I went through Ch7 bankruptcy 6 years ago with 4 years to go. It did relieve a lot of debt that we knew we could not pay back. Our lawyer asked where were all the big purchases. We didn't make any. We bought gas and food with our credit card for a few years when we were having trouble getting jobs and stablize. Sad to say we're still struggling but there are no credit cards , no car payments, no cable, in fact our tv just died. No cell phones or internet except the library. I am glad we went through it even though it is hard for us to get jobs because of the bankruptcy. The credit card just fell of out credit even though the backruptcy is still there for 4 more years. Now I refuse to build me credit. I pay cash for everything and I have a budget as small as my income is. I listen to DaveRamsey and I'm trying to do the baby steps save $1000 for a small emergency fund, debt snowball, finish funding 3 to 6 months emergency fund of income, invest 15% of income in retirement, college for children, pay off the house. Build wealth. I'm at the beginning so I have a long way to go

Top Contributor

Reply by
free88free88

14 Contributions
194 People Helped
Helpful to 5 out of 7 people

Sadly, that is another factor Ocober29.  How much money you make will invariably affect how fast or slow you can possibly recover from BK.  Lenders will be much more likely to extend credit to those who make more versus those who make less, given that everything else is equal.  At the end of the day, its all about the dollars.  People who make more have more available to pay as interest, and thats all they care about.

You hang in there.  If you already have your house and plan to die in it, then building credit should not be a high priority for you anyway.  Thats the main reason for most people to build their credit in the first place.

2 Contributions
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Helpful to 6 out of 10 people

It's been 7 months since being discharged through Chapter 7, everything is looking good minus two issues on my credit report. There are two credit cards that still show as open accounts, the odd part is that I see the bankrupcy acknowledgement in their note sections. Is more time needed before the accounts will auto close on their own or do I acually have to call and ask that they be closed? 

2 Contributions
1 Person Helped

Helpful to 1 out of 1 people

I was told by Chase bank our first Mortg would be reaffirmed we filed bankruptcy , then got our loan modified and they said I had to reaffirm it. we were told mce our loan was modified it would be reaffirmed 5 years later is is not GRRRRRRRRRR.

Reply by
cowh41

1 Contribution
1 Person Helped
Helpful to 1 out of 1 people

Same thing happened to me. And I wasn't able to refi which would have been to the mortgage companies benefit.

As I understand.,,, since its not re affirmed,, as long as you make payments, you keep it. Since it wasn't  re affirmed, you could walk away from it .. technically if you wanted to. The bad part is that if you stay in your house and make timely payments, they are no longer being reported, so it doesn't really help you as far as rebuilding your credit.

4 Contributions
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Helpful to 0 out of 1 people

degrees23:

First of all, you are rude and condescending......Second, my lawyer DIED suddenly and unexpectedly.......THIRD, though there us a lot of info on this webite, as a single parent of an autistic child, I am BUSY, TIRED, and dont have TIME to read through all the posts..... Fourth, I was unsure if laws are different from state to state.

I highly suggest you stop posting if you cannot do so in an acceptable manner. Your obvious lack of maturity is reflected in your  lack of consideration. HAVE A NICE DAY.

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