What is Bankruptcy?
There are two main consumer bankruptcy Chapters which you can use to obtain a “fresh start.” Chapter 7 Bankruptcy is the most common example of consumer bankruptcy and is utilized when you can no longer pay your creditors. Under Chapter 7 Bankruptcy, your possessions are liquidated in order to pay off your creditors. However, you are afforded a significant amount of exemptions in which basic assets can be protected. On the other hand, Chapter 13 Bankruptcy allows you to keep most of your assets (without being sold off), but an affordable 3 – 5 year repayment plan is organized and ordered by the court. Regardless of which chapter you file under, the underlying purpose is the same: 1) you want a “fresh financial start,” 2) you want to create a clean slate for future credit, and 3) you want to end collections, lawsuits, and collection harassment. Overwhelmingly, these three purposes far outweigh any concern for your existing credit reports. Despite that, many consumers are still concerned with how bankruptcy will affect their credit reports.
How Will Bankruptcy Affect My Credit?
Bankruptcy, in effect, does ruin your credit for several years… perhaps no worse than what your credit state already is. A bankruptcy notation in your credit reports effectively tells future creditors that you were not able to pay off your debts according to your past credit agreements. Upon seeing the notation, very few, if any, lending institutions will be willing to give you future credit after you declared bankruptcy. From the lender’s perspective, your recent bankruptcy is too much of a liability for the lender, and lenders believe they have to protect themselves as well.
Typically, however, your credit will not be any good now especially if your past defaults are continuing to accrue and run into the future. So, while you may be concerned about your credit reports, aren’t they already ruined? If so, why not explore the “exhale” bankruptcy can provide you? Those who declare bankruptcy can start again and rebuild their future credit worthiness. While your credit reports and credit score will be poor for a while, you may have the opportunity to rebuild them and restore them with the lessons you have already learned. Hopefully, the next time around you won’t repeat your past mistakes.
How Long Will Bankruptcy Affect My Credit?
This amount of time bankruptcy will affect your credit varies. There are two scenarios in which this plays out. In the first scenario, if a future creditor asks if you previously filed for bankruptcy, you will have say yes without regard to the time since. On the other hand, as far as your bankruptcy being reported by credit reporting agencies, there are time limits. A Chapter 7 bankruptcy can be reported for no more than 10 years. A Chapter 13 bankruptcy can be reported for no more than 7 years. Under either Chapter, as early as one year after a bankruptcy, the credit effects begin to evaporate and the rate of evaporation accelerates as time passes on. This generally applies to unsecured credit. Major credit buying, like mortgages, however, may take 3 – 5 years before the effects of bankruptcy begin to evaporate.
Credit Reports Do Not Matter; A Fresh Start Does
While filing bankruptcy has a negative impact on your credit reports, it can be the only viable solution left if you are in deep, irreconcilable financial trouble. Although bankruptcy should never be filed lightly, the considerations of credit reports should take a back seat to this extremely important decision.