Bankruptcy. It’s a scary word. To most people, it sounds like a financial death sentence.
But it’s actually not. Consider the fact that in 2016, almost 800,000 Americans filed for bankruptcy. The number one reason? Mounting medical bills, according to the Kaiser Family Foundation.
While bankruptcy is serious and does have a significant impact on your financial abilities, it’s not a monumental failure or a financial death sentence. Bankruptcy exists as a tool for people who find themselves in a financial situation that they just can’t fix.
Bankruptcy will not have a hold on your finances forever. In fact, it’s even possible to start rebuilding them right away.
How long will a bankruptcy stay on my credit report?
Anything on the public record (including bankruptcy) stays on your credit report for up to 10 years. However, in some cases, a bankruptcy can fall off your credit report in 7 years. This largely depends on the type of bankruptcy you declared. As a consumer, you will file either Chapter 7 bankruptcy or Chapter 13 bankruptcy.
Most consumers file for Chapter 7 bankruptcy over Chapter 13 bankruptcy. They assume that Chapter 7 bankruptcy is better, because it doesn’t require you to pay back your debts. Chapter 13 bankruptcy does require you to pay back some or all of your debts. So, Chapter 7 sounds better, right?
Well, not necessarily. Firstly, you need to qualify for Chapter 7 bankruptcy. You must be able to prove that you have no disposable income or liquidity and that your current monthly income is below your state’s median rate in order to file for Chapter 7 bankruptcy.
On top of that, it is easier to get Chapter 13 bankruptcy off of your credit report in 7 years than Chapter 7 bankruptcy. According to Equifax, Chapter 7 bankruptcy and non-discharged Chapter 13 bankruptcy remain on file for 10 years from the date filed. However, if a Chapter 13 bankruptcy is discharged, it remains on file for only 7 years from the date filed. Your bankruptcy is discharged once you’ve completed your payment plan and shown the courts that you’ve repaid your creditors the amount necessary.
In short: a bankruptcy will usually remain on your credit report for 10 years. However, with very quick repayment on a Chapter 13 bankruptcy, it is possible to have the bankruptcy come off of your report after only 7 years.
It’s worth noting that regardless of what type of bankruptcy you file, the accounts related to your bankruptcy will fall off of your credit report after 7 years. Furthermore, while bankruptcy can relieve you of the obligation to pay some debts, there are certain debts that cannot be legally discharged. These include child support, recent taxes, and student loans.
What can I do to improve my credit score with a bankruptcy?
In the meantime, remember that bankruptcy is not a financial death sentence. In fact, you don’t even have to wait 7-10 years to start rebuilding your credit.