How does Chapter 7 bankruptcy affect my credit?
Chapter 7 bankruptcy discharges most unsecured consumer debt, essentially wiping the slate clean. Secured debt, like auto loans and mortgages, can be reaffirmed or, if you no longer want the asset, repossessed.
In other words, Chapter 7 does not mean giving up your house or your car—but if you want to keep them, you will need to keep paying for them. Chapter 7 also cannot usually be used to discharge student loans or child support in arrears.
Chapter 7 is not available to everyone; to qualify, you will need to pass a means test. If your annual income is lower than your state's median income, you automatically pass the means test. Those who earn more than the median income may still qualify depending on factors like total debt load.
When you file for Chapter 7 bankruptcy, your credit score could take a hit of anywhere from 130 to 250 points. This impact will vary depending on whether your credit was good, fair, or poor when you entered bankruptcy.
If you already have a foreclosure or a few missed payments on your record, your score may not drop as much as it would if you began the process with pristine credit. Either way, after filing, your score could end up lower.
How does Chapter 13 bankruptcy affect my credit?
A Chapter 13 bankruptcy does not discharge debt. Instead, it restructures your debt into a payment plan. Chapter 13 could be better for those whose incomes disqualify them from Chapter 7 or those who want to keep property that might otherwise be subject to liquidation.
Like a Chapter 7 bankruptcy, a Chapter 13 bankruptcy can cause your credit score to drop by 100 points or more.
The Rocket Lawyer Bankruptcy Worksheet can help you organize the information you need to determine whether bankruptcy is right for you.
How long will bankruptcy negatively impact my credit?
The Chapter 7 bankruptcy can remain on your credit report for up to 10 years, though the impact on your credit score will usually begin to wane long before then. By being proactive about rebuilding your credit, most people can get their credit scores close to pre-bankruptcy levels after five or six years.
A Chapter 13 bankruptcy can stay on your credit report for seven years after filing. Because most Chapter 13 repayment plans last three to five years, your credit can begin to recover just a year or two after exiting bankruptcy.
What should I do to improve my credit after emerging from bankruptcy?
When you exit bankruptcy, you want to boost your credit score as much as you can. There are several steps you can take:
First, keep an eye on your credit report and correct any errors. The Rocket Lawyer Free Credit Report Challenge can help you dispute any suspicious or inaccurate items on your credit report.
Second, pay all bills on time. Late payments can be a major blow to your credit score and may indicate to lenders that bankruptcy did not solve your financial problems. If you have trouble paying a bill, talk to the lender or creditor about alternate payment arrangements.
Next, consider getting a secured credit card. It is a myth that you need to take on debt to rebuild your credit, but a secured credit card acts like a prepaid debit card. You can start to rebuild your credit without going into debt by paying for regular expenses with a secured card.
Fortunately, the credit scoring process tends to weigh recent activity more than past activity. As the years go by, negative items like bankruptcy and late payments can have less of an impact than more recent responsible spending.
Bankruptcy can be a complicated process and may impact your finances for years. While bankruptcy is the right choice for some, it is important to explore all your options before filing. Reach out to a Rocket Lawyer On Call® attorney for targeted legal advice that can help you make an informed decision about bankruptcy and other legal matters.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.