Bankruptcy can be an effective solution to aggressive debt collection, but it also means limitations on your credit opportunities for the immediate future.
Those who file for personal bankruptcy and successfully discharge debts will lose all of their revolving lines of credit in the discharge. An individual’s credit score will often drop by 200 points when they first file for bankruptcy.
The record of the discharge of their debts will stay on the filer’s credit report for years. Every lender, from credit card companies to a mortgage lender considering you for a home loan, will see the record of your bankruptcy. When will that discharge record finally come off of your credit report?
The impact of your discharge depends on the kind of bankruptcy
There are multiple chapters of bankruptcy available to individuals with significant personal debt. Chapter 13 and Chapter 7 are the most common forms of bankruptcy filed by individuals.
Chapter 7 or liquidation bankruptcy may require that someone sell some of their personal property to repay creditors before their discharge. Chapter 13 or wage-earners bankruptcy requires that they make payments to the courts for years before the discharge of their debt.
The faster Chapter 7 bankruptcy discharge will remain on an individual’s credit report for 10 years. However, a Chapter 13 discharge will come off of someone’s credit report a bit sooner. The courts can only report a Chapter 13 discharge for seven years, just like any other blemish or debt.
The bankruptcy doesn’t need to disappear for you to get credit
The idea that the bankruptcy has to fall off of your credit report for you to obtain credit is a myth. Many people will qualify for small lines of credit and credit cards with suboptimal terms in the first six months after their bankruptcy discharge.
Others will find that within a year or two, they may qualify for small to moderate loans, like vehicle loans, although with higher interest rates. Some people can qualify for a mortgage or a car loan with decent terms between three and five years after their discharge. The amount of effort you invest in rebuilding your credit will influence how quickly you qualify for credit opportunities and how competitive they are after your bankruptcy discharge.
Learning more about how bankruptcy affects your finances can help you make important decisions, like which form of bankruptcy to file.
