Credit Report Articles

How Filing Bankruptcy Impacts Your Credit

Bankruptcy and Credit Report

Millions of Americans have filed for bankruptcy protection since the economic collapse and subsequent recession in 2008. For many consumers, bankruptcy was a last resort to control their debt. If you are in the midst of a financial crisis and are trying to determine whether bankruptcy is right for you, make sure you understand the impact filing will have on your finances, credit report and credit score.

The most common type of bankruptcy for individual filers is Chapter 7 and Chapter 13.

Chapter 7

Known as liquidation bankruptcy, allows a court-appointed trustee to sell off all non-exempt assets, the proceeds of which are paid to creditors. Non-exempt assets may include collectibles or family heirlooms, investments, bank accounts, and vehicles or homes. The remainder of the debt is discharged.

Chapter 13

Allows you to restructure your debt and establish a timeline - generally three to five years - to pay back the debt you owe, typically under a lower interest rate. Your debts will be divided into secured debts - such as your home and vehicle - and unsecured debts - such as credit cards and utilities. You will pay secured debts directly to creditors and payments for unsecured debts will be paid to the trustee, who will deal with creditors on your behalf.

Weigh these options carefully before making a decision. Regardless of the type of bankruptcy you choose, your credit score will take a heavy hit. The impact to your score depends on your overall credit prior; however, it’s likely your score will drop between 160 and 220 points.

The details of your bankruptcy will also appear on your credit report. Unlike other types of negative information, which are continuously reported to the credit bureaus for up to seven years, a bankruptcy filing may remain on your credit report for roughly seven to 10 years.

Explore all debt repayment options before filing for bankruptcy in order to protect your credit score from damage. But if you decide bankruptcy is the only option, keep in mind that your credit is not ruined forever; you can take steps to rebuild it.