Unexpected events like job loss and medical issues can result in financial hardship. If someone reaches a point where they are overwhelmed financially and they’ve exhausted all other options, bankruptcy is an option. Declaring bankruptcy is a big decision and it has a significant impact on a person’s credit. Once the bankruptcy filing is listed on a credit report, it has the potential to affect the score for years. Let’s take a look at why bankruptcy negatively affects a credit report and how long the declaration remains on the report.
What Is a Credit Report?
According to the Board of Governors of the Federal Reserve System, a credit report contains the following information:
- Your identity. This includes your name, address, full or partial Social Security number, date of birth, and employment information.
- Your existing credit. Existing credit compromises of credit card accounts, mortgages, car loans, and student loans. Information regarding terms of your credit, how much you owe, and your history of making payments may also be included.
- Your public record. A public record includes any court judgments against you, tax liens against your property, and whether you have filed for bankruptcy.
- Inquiries about you. Inquiries come from companies or persons who recently requested a copy of your credit report.
Credit reports allow lenders, insurers, employers, and others to assess how you manage financial responsibilities. A person’s credit score can range from 300 to 850, with 300 being considered very poor and 850 being considered excellent. The majority of people have a score between 661 and 780, which is considered good.
How Bankruptcy Impacts Your Credit
Credit reports are negatively affected when you file bankruptcy; however, those negative effects lessen with each year that passes. A person may see a dramatic drop in their score in the first month following a bankruptcy filing, but scores typically increase over time.
When a person files for bankruptcy, the act could prevent them from taking on additional credit. This is because creditors are often wary of lending to someone who has a history of failing to make payments.
Negative credit information generally stays on a credit report for seven years. In the event you file for personal bankruptcy, that information can stay on your report for up to ten years—and in some cases, even longer. The type of bankruptcy you file has an impact on how long your credit report is affected. In general filing Chapter 7 bankruptcy, also known as liquidating bankruptcy, will stay on your report for ten years. Chapter 13 bankruptcy, however, typically only stays on a credit report for seven years.
It’s important to note that you don’t have to take any steps after those seven to ten years are up. Bankruptcy and any included accounts will automatically be deleted. Once that time has passed, the fact that bankruptcy was filed will no longer impact your credit report, giving you the ability to build and maintain strong financial health.
Reestablishing Good Credit
After declaring bankruptcy, there are steps a person can take to begin rebuilding their credit. For those who have struggled with credit card debt, it might be a good idea to consider applying for a secured credit card. A secured credit card requires a deposit that acts as your credit limit. If you make your payments on time and in full on the new card, there’s a credit chance of regaining eligibility for an unsecured card in the future. You could also look into getting a credit-builder loan, which is typically offered at credit unions and community banks.
Paying bills and existing lines of credit on time is crucial. Payment history is the single biggest factor affecting a credit report. In order to rebuild credit after filing for bankruptcy, you have to be prompt with your payments. Just like filing for bankruptcy, late payments can stay on your report for up to seven years.
If you do have a credit card after you file for bankruptcy, try to keep most of your credit limit available. This means that you should keep the percentage of your limit that you’re using as low as possible.
Learn More About Bankruptcy With Belsky, Weinberg & Horowitz, LLC
If you’re currently experiencing financial hardship in Baltimore or in any of the surrounding Maryland communities, you may want to learn about your options regarding bankruptcy. The lawyers from Belsky, Weinberg & Horowitz, LLC can explain the process to you and the potential implications on your future.
If you decide to file bankruptcy, we can help you determine which chapter to file, guide you through the process, and ensure you understand your legal rights and obligations. Contact us today to learn more.
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