Bankruptcy can help people in financial trouble reduce or eliminate debts they can’t afford to pay. But the downside is that it has severe consequences for your credit, appearing on your credit report and affecting your credit scores for years to come.
How Does Bankruptcy Appear on Your Credit Report?
There are two common types of personal bankruptcy. Chapter 7 bankruptcy involves selling off some or all of your property to pay off your debts. Chapter 13 bankruptcy allows you to keep your property, but you must complete a repayment plan that lasts three to five years.
No matter which type of bankruptcy you choose, it can appear on your credit report and be visible to anyone who performs a credit check, including credit bureaus, lenders, credit card issuers, employers and landlords. Chapter 7 bankruptcy stays on your report for up to ten years while Chapter 13 bankruptcy stays on your report for up to seven years.
Bankruptcy can affect your ability to qualify for credit cards, loans or access more favorable borrowing terms. It can even affect your ability to rent certain homes or work in specific jobs.
How Will Bankruptcy Affect Your Credit Scores?
Bankruptcy can almost certainly have an immediate negative impact on your credit scores. But the level of damage depends on many factors, including the state your credit was in before you filed for bankruptcy.
If your credit scores were in the good to excellent range, your credit score can take a much steeper hit. As a result, you can expect a significant drop in your credit scores immediately following the bankruptcy.
But many people who file for bankruptcy have a history of late payments and delinquent accounts. If you already have credit scores in the lower range, bankruptcy can have a less severe effect on your credit scores than it would if you had better credit.
Helping Your Credit After Bankruptcy
Bankruptcy has both short-term and long-term consequences for your credit. But the good news is that you don’t have to wait to achieve you credit goals.
Once your bankruptcy is discharged, the debts that have been discharged can no longer show up as delinquent or past due, and you can work on helping your credit with the following behaviors:
Paying Your Bills on Time
Payment history is the biggest factor that makes up your credit score, so paying your bills by the due date every month can help your credit over time.
Maintaining Low Credit Utilization
Don’t use too much of your available credit. Try keeping your credit card balances under 30% of your available credit limit. Ideally, you should pay your full credit card balance every month.
Creating a Budget
Making a budget can positively impact your credit by enabling you to manage your finances more responsibly.
Don’t open credit cards or take out loans you can’t easily manage with your income. Doing so would make you more likely to miss payments or have accounts go into delinquency.
Monitor Your Credit
It’s important to ensure that the information in your credit report is accurate post-bankruptcy and that discharged debts are updated accordingly.
Over time, you should check that positive information is getting reported and dispute any inaccurate information on your report. Consider signing up for a credit monitoring plan so you can stay on top of your credit scores and review changes to your credit report as soon as they occur.
After seven or ten years, the bankruptcy can be removed from your credit history and no longer affect your credit score. If you’ve worked hard on your credit, your credit scores should be much better than they were immediately following your bankruptcy.