Bankruptcies have increased dramatically in the past twenty years, with over 1.5 million people filing for them each year. While bankruptcy has the advantage of providing the filer with a fresh financial start, it also has long-term negative effects on the filer’s credit.
One of the drawbacks is that bankruptcy is included in credit reports. The exact length a bankruptcy stays on credit reports depends on whether the individual filed a Chapter 7 or Chapter 13 bankruptcy.
Under Chapter 7, most debt is eliminated, and there is no repayment of debt. Due to this, Chapter 7 is the most serious form of bankruptcy and remains on your credit report for ten years from the date of filing.
Chapter 13 restructures the filer’s debt, some or all of which is repaid over a period of three to five years. The bankruptcy remains on your credit report for seven years from the date of filing.
Once the time is up, the bankruptcy is deleted from your credit report. You need to take no action to make this happen.
How Does the Bankruptcy Affect My Credit Score?
Bankruptcy is not only is included in your credit report. It also negatively impacts your credit by reducing your credit score.
When discussing credit scores, we’re talking about FICO scores. These are the industry standard and are used in one form or another by the three major credit bureaus: Equifax, Experian, and TransUnion.
While estimates vary, a Chapter 7 filing can reduce a credit score by up to 200 points. With a Chapter 13 filing, the reduction is typically less than that of a Chapter 7 filing.
What Steps Can I Take to Repair My Credit?
Since good credit is the key to many of life’s major purchases like homes and cars, it’s critical to take steps to repair your credit score in the aftermath of bankruptcy and its inclusion on your credit report. To understand how it’s important to know how the FICO score is determined. Currently, it comprises five main factors:
- Payment history (35%). This indicates how much risk there is associated with extending new credit. It’s the most important factor in your FICO score. So no matter what else you do, make sure your payments are timely.
- Amount of money owed (30%). While having extensive credit may not mean you are a high-risk borrower, it may indicate you are overextended.
- Length of credit history (15%). Generally, the longer your credit history, the more positive your FICO score is. The following factors are taken into account: age of the oldest account, the average age of accounts, age of the newest account, length of specific accounts, and time since you last used an account.
- Mix of credit (10%). This refers to the types of credit you have. Examples include mortgages, student loans, retail accounts, car loans, and credit card accounts.
- Inquiries for new credit (10%). Experience has shown that when you open several new credit accounts in a short timeframe, you are likely to be a greater credit risk.
The percentages provided are for the general population but may vary by individual. For example, they will likely be different for people with little credit history as opposed to those with a lifetime of credit usage.
How Can I Get Credit While Repairing My Credit Score?
In the immediate aftermath of a bankruptcy discharge, it will be difficult to get credit. However, there are some ways to do so, and at the same time have these steps may count towards an improved credit score. These include:
- Secured credit. While traditional unsecured credit cards may not be possible right away, consider a secured credit card. This works by giving the credit card issuer a deposit, which helps serve as a credit line. Check the reports from the three major credit bureaus to be sure this activity is listed on their reports.
- Cosigning. By having a family member cosign, you might be able to get a small loan or credit card.
- Authorized user. A loved one with responsible credit may add you as an authorized user to their credit card account. As an authorized user, you have permission to use the card but are not responsible for payments. However, not all lenders are willing to report authorized accounts to the credit bureaus, so make sure yours does.
The Path Forward
Bankruptcy has many advantages, but it takes a hit on your credit. The major credit bureaus include the bankruptcy on credit reports for seven to 10 years, depending on the type of bankruptcy.
Fortunately, in the aftermath of a bankruptcy discharge, there are many steps you can take to both repair your credit and also begin obtaining it again. If you have any questions about bankruptcy and its impact on your credit, fill out our free evaluation, and a local bankruptcy attorney will be in contact.