How does filing bankruptcy affect your credit report? To answer this we need to understand 1) some facts and 2) how those facts apply to your life.
To give you an idea where this is going, the truth is that it depends on your situation. But if you’re like many people with challenging finances, filing bankruptcy can be the very best thing you can do to improve your credit report.
FIRST, WHAT ARE THE FACTS?
Of course bankruptcy is a significant adverse event on your credit report.
Fact #1: However, a bankruptcy filing does NOT stay on your credit report forever. That it does is a commonly held myth. You can rebuild your credit record and credit score after bankruptcy.
Fact #2: There are strict legal limits on how long a consumer bankruptcy can be reported on your credit record.
But there’s some confusion here that needs a quick explanation. The federal Fair Credit Act requires consumer reporting agencies to remove all bankruptcies from credit reports after 10 years. 15 U.S. Code Section 1681c(a)(1). However, many sources state that this 10 years only applies to Chapter 7 “straight bankruptcy”; that it’s only 7 years with Chapter 13 “adjustment of debts.” For example, see the recent How long does bankruptcy stay on your credit reports? from Credit Karma.
The answer to this discrepancy? As stated on our local bankruptcy court’s website: “We are informed that the policy of the Associated Credit Bureaus [now the Consumer Data Industry Assn.] is to remove successfully completed Chapter 13 cases from the credit report after seven (7) years to encourage debtors to file under this chapter.” See also this webpage saying the same thing from Experian, one of the three major credit reporting agencies.
So for practical purposes, a Chapter 7 stays on your credit report for 10 years while a Chapter 13 for 7 years.
Fact #3: Bankruptcy can nevertheless improve your credit much more quickly than if you didn’t file. A major reason for this is that once your debts are discharged they will be reported as such and show a zero dollar balance. Radically reducing the amount of your debts is a major step in improving your credit.
SO MY CREDIT IS NOT TRASHED THROUGHOUT THE TIME BANKRUPTCY IS ON MY CREDIT REPORT?
It’s generally not. Here are some more facts about this.
Fact #4: Most adverse items stay on your credit report for 7 years. These include late payments, accounts placed for collections and/or charged off, foreclosures, lawsuits and judgments, and most other public records. 15 U.S. Code Section 1681c(a)(1). If you put off filing bankruptcy, more and more of these events will keep hitting your credit report. Filing bankruptcy prevents all or most of these adverse events from occurring. You make the decision to file and to start rebuilding your credit instead of putting it off longer and longer.
Fact #5: As common sense would tell you, the longer ago an adverse item appears on your credit report the better. If during the last few months you’ve had many late payments and let’s say a creditor’s lawsuit and judgment, that same information after two or three years is seen more favorably. That’s also true about bankruptcy itself. In the right circumstances a bankruptcy filing even just two or three years old can be seen more favorably than one filed more recently. So again it often makes sense to get it filed in order to start the clock running on improving your credit.
Fact #6: Your credit report and credit score are essentially predictions about your ability to repay a new debt. When you have a lot of debt, and especially if there are judgments and liens, you likely have no capacity to take on new debt. Permanently getting rid of all or most of your debts, judgments and liens would very likely improve your capacity to take on new debt (regardless whether you actually do so), thereby improving your credit record. Although bankruptcy usually reduces your credit score significantly, for many people it climbs back up surprisingly fast. After all, bankruptcy usually makes you a much better credit risk than you were before.
Fact #7: If your credit report and score are important to you, there’s a lot that you can do to improve them after filing bankruptcy. More about that below. The point right now is that if your financial circumstances are crying out for bankruptcy relief, once you take that necessary step you can then also take concrete steps to get to a good credit record faster.
HOW DO I APPLY ALL THIS TO ME?
This is where it gets personal, and requires some tough honesty. Applying these truths about bankruptcy and your credit record requires making wise and sometimes tough choices. It means prioritizing among what you value in life. Here are some important considerations to help you with this.
THE BEST WAY TO PREDICT THE FUTURE IS TO KNOW YOUR OPTIONS NOW
It’s perfectly understandable to hesitate to file bankruptcy in an effort to protect your credit record. A good credit record is a valuable thing. It can save you money on future credit and it makes you feel good.
But the reality is that people overwhelmingly delay seeing a bankruptcy lawyer longer than they should, in part in the hopes of preserving their credit record. They do so even when that hope is no longer sensible. So in trying to save their credit, they very often end up hurting it. They wait longer than they should. Hope springs eternal.
The practical truth is that a lot turns on predicting the future: will you need to file some form of bankruptcy or not? Maybe if you can avoid filing you can prevent that hit on your credit record. But the reality is that our pride and fears get in the way of being able to be objective about how much financial trouble we’re in. Most people don’t like to ask for help. That’s especially true about finances, and about getting legal help. It feels like a public admission of failure.
So it turns out that the best way to find out whether you (and your credit record) would benefit from filing bankruptcy is to find out your options now. The key job of a “bankruptcy lawyer” is actually not to file bankruptcies: it’s to help financially challenged people like you understand their options and then help you make good decisions about those options.
Once you understand your options you’ll be more in charge of your future, including about your credit record.
WHEN MAKING A CHOICE IT’S CRUCIAL TO PRIORITIZE
You have many things to protect, in addition to your credit record. Among them are your peace of mind, your mental and physical health, your financial security, and all of these things for your family and/or others close to you. It’s sometimes tempting to focus too much one or two of these, and lose sight of how important the other values are to your well-being.
As you learn about your options—bankruptcy and otherwise—you’ll be able to prioritize your credit record appropriately among all your other values.
IF YOUR CREDIT RECORD IS IMPORTANT AND YOU STILL NEED TO FILE BANKRUPTCY, YOU CAN ACT TO REBUILD YOUR CREDITOR RECORD
Again, for most people their credit record is important, for both practical and personal reasons. For some people it doesn’t feel important because they’ve been so hurt by their creditors that they’d almost prefer living without worrying any more about credit. But most don’t have that option.
So if you assume that you’ll be filing some form of bankruptcy, here are some steps you can (and generally should) take to help build back your credit faster.
STEP #1: MAKE IT GOOD BANKRUPTCY
Be conscientious as you go through your bankruptcy process.
That includes picking a bankruptcy lawyer you’re happy with, who listens well and explains your options in a way that you understand. Does the person come across to you as both knowledgeable and trustworthy? If not, find one who feels right.
Be completely honest with her or him, so that you can be fully protected.
Work hard to provide what your lawyer needs. For example, provide a thorough list of your creditors, including all collectors. You want your bankruptcy to protect you completely. Otherwise building back your credit will be harder.
This includes reviewing your credit record both before and about a month after filing your bankruptcy case. You want to make sure you include all creditors. Then you want to ensure that the creditors report your debt appropriately, acknowledging your bankruptcy filing.
STEP #2: REVIEW YOUR CREDIT RECORD AFTER DISCHARGING YOUR DEBTS
Within a month or so after getting your discharge—your legal write-off of your debts—all your affected debts should show on your credit record that you no longer owe them. Get a free credit report at AnnualCreditReport.com from all three of the major credit reporting agencies. (Federal requires these to be free annually, but “[d]uring the COVID-19 pandemic . . . [they] are continuing to offer free weekly credit reports.”)
Mistakes happen. And creditors and collectors have been occasionally known to abuse the law to their advantage. Looking at your credit reports and acting on any errors will prevent delays in improving your credit record and score.
STEP #3: BUILD YOUR CREDIT BACK MUCH BETTER
Of course you’ll want to make it a very high priority to avoid putting any new adverse events onto your credit report after filing bankruptcy. So try to be perfect in making any payments—under either Chapter 7 or Chapter 13—that you are required to make. This includes making reaffirmed vehicle payments, continuing home mortgages, and monthly income tax and support obligations under Chapter 7. It includes the Chapter 13 plan payment and any other debts being paid “outside the plan.”
Beyond that, when the time is appropriate you may decide to incur new debt. Credit cards companies will likely send you offers, but be careful about exorbitant interest rates and other fees. Same with vehicle lenders. You’ll pay higher rates for a while, but it still pays to shop around. Don’t just go for the first offer that shows up. You have more leverage than you think—they want your business, and it’s worth being patient and putting in the effort.
If necessary it may be worth looking into a secured credit card—here’s some information on those along with some current examples. Also, consider asking someone who trusts you (and you trust as well!) to co-sign a debt with you.
STEP #4: REVIEW YOUR CREDIT RECORD 7 OR 10 YEARS AFTER FILING
Find out if the credit reporting agencies remove your bankruptcy case when they are required to do so. Adverse events other than the bankruptcy filing should also be deleted after 7 years. So should a Chapter 13 filing.
If you find an error on your credit record, there is a procedure for disputing it. The credit report itself includes directions for how to do so. Also, here is a webpage from the Consumer Financial Protection Bureau about How do I dispute an error on my credit report?
You should usually be able to handle such disputes yourself. In unusual situations you could involve your (former) bankruptcy lawyer. The Consumer Financial Protection Bureau is also a resource: here’s an example how that federal agency can help.