Intro
Bankruptcy is a big and scary word, usually because people don’t know the ins and outs of it. One of the biggest concerns is how long it stays on a credit report.
The answer to that concern depends mainly on what type of bankruptcy you file. Generally, it can take 7-10 years for a bankruptcy to vanish from your credit report.
The Different Types of Bankruptcy
The two main types of bankruptcy for individuals are Chapter 7 and Chapter 13. The big difference is that one requires repayment and the other does not.
Chapter 7 Bankruptcy
Chapter 7, the most common type, is the type of bankruptcy that does not require are payment plan. It’s a full liquidation of all of your assets. Those assets are then sold in order to cover the outstanding debt.
Any debts included in the bankruptcy will most likely affect your credit report. These will be listed as “discharged debts” or “included in bankruptcy” with a $0 balance.
Chapter 13 Bankruptcy
With Chapter 13, the person filing for bankruptcy develops an agreement to pay back some or all of the debt. Usually, this involves a payment plan lasting 3-5 years. After paying back the debt, it can then be eligible for discharge.
Usually, lenders see Chapter 13 bankruptcy as the more favorable of the two types because you’ve agreed to pay back at least some of the debt.
How Long Can Bankruptcy Affect Your Credit Scores?
The length of time that bankruptcy stays on your credit report depends on the type of bankruptcy you’ve filed.
Chapter 7 bankruptcy will be on your report for 10 years from the date you filed. After that point, the negative mark with drop off. Also, the debts included in the bankruptcy that can hurt your credit report should fall off seven years from the date of filing (unless they were delinquent before filing for bankruptcy,in which case they could fall off sooner).
With Chapter 13 bankruptcy, it will automatically fall off your report after seven years from the date of filing, assuming the payment plan is completed and all debts have been paid (discharged). However, a non-discharged or dismissed case can stay on your report for 10 years.
But, just like Chapter 7, any accounts that were delinquent before filing can disappear from your report sooner.
Chapters 11 And 12 Bankruptcy
There are two other types of bankruptcy that don’t relate to individuals: Chapter 11 and Chapter 12.
Chapter 11
This is the type of bankruptcy that large businesses would file for when trying to shuffle their debts in order to stay in business. The reason businesses (corporations, limited liability companies, and partnerships) use Chapter 11 is because if they file for Chapter 7 bankruptcy, they must stop operating.
Most law firms don’t even handle Chapter 11 cases because they’re so complicated. But Chapter 11 is the only way a business can file for bankruptcy and continue operations.
In some cases, people will file for Chapter 11. For example, if a person or married couple filing jointly have so much debt that it goes over certain limits, then they can’t file for Chapter 13. The limits are adjusted every three years depending on the cost of living difference since the previous adjustment.
If the individual or married couple have debt over those set limits, they can’t file for Chapter 13 and must file for Chapter 11.
Chapter 12
Chapter 12 bankruptcy is for farmers and commercial fisherman. They would use Chapter 12 in the same way businesses use Chapter 11 — to reorganize debts so they can keep operating. The big difference (and benefit) is that Chapter 12 involves annual payments based on when the fisherman or farmer earns their money. And, unlike Chapter 13 but like Chapter 11, they are not restricted to a five-year repayment plan.
As with Chapter 11, Chapter 12 cases do have a debt limit, but it’s much higher than Chapter 13’s debt limits.
Other Negative Items
There are other negative items that can show up on a credit report and, ultimately, lead to a person filing bankruptcy. So what happens to these items after someone files for bankruptcy?
Late Payments
After you file for bankruptcy, it’s true that your accounts will be listed as “paid off.” However, your credit report will still show the payment history of those accounts, including any late payments.
These late payments will fall off after seven years from the date of first delinquency.
Charge-offs
If you file for bankruptcy, it will have to include any charged-off accounts you have. Doing so actually prevents debt collectors and creditors from contacting you — but it’s different with a charge-off. If you have a charge-off listed on your bankruptcy, the collectors who are then holding your debt could contact. And, most likely, they will.
That’s why it’s important to consider bankruptcy before one of your accounts is charged off.
Collections
Some people wonder, “Can I file for bankruptcy to avoid my account going to collections?”
The answer to that is yes, but also not really.
Once you miss a payment, your account gets flagged as a “collection account.” That’s when the lender or a collection agency starts calling you. And in many cases, people file for bankruptcy just to make the collection calls and harassment stop.
So, yes, you can file for bankruptcy to avoid collectors, but that reason alone may not be good enough. It depends on how much debt you have, so you may want to get a consultation with a bankruptcy lawyer before filing.
Public Records
Bankruptcy is a type of public record that appears on your credit report (other types include a tax lien, judgment, foreclosures, and repossessions, depending on your state).
And, as we mentioned earlier, bankruptcy is a public record that can remain on your report for 7-10 years.
Tax Liens
Tax liens — another type of public record — may be removed from your credit report after you’ve paid the lien. Then you’d have to request that either the IRS or your state’s revenue department release the lien.
However, the lien may never be removed from the public record, but paying it off can definitely help you rebuild your credit.
How To Remove Bankruptcy From Your Credit Report
Simply put, you don’t need to (and can’t) do anything in regards to removing a bankruptcy from your credit report. If you filed bankruptcy, it as well as the included debt accounts will automatically falloff after 7-10 years.
Regardless of when the accounts have been “discharged,” it will still take that 7-10 years for the bankruptcy to go away.
If the bankruptcy doesn’t go away after the expiration day, you can and should dispute it. Here’s a quick rundown of how to dispute an error:
- Look at your credit report and confirm that the bankruptcy should have expired but is still on the report
- Put together your evidence, which could include credit card and loan statements, loan docs, and/or bank account statements
- Dispute the error with all three credit bureaus — you can do this online, in writing, or over the phone
How To Build Your Credit After Bankruptcy
Now to the big question: can you rebuild credit after a bankruptcy?
Yes, you can. And we’ve put together a checklist of things you can do to help build your credit.
Look At Your Credit Report
It’s important to keep an eye on your credit report in case of fraud or errors. You can dispute and flag these issues, ask for them to be corrected, and then take steps to protect yourself from future identity theft.
Get The Free Credit Report You’re Entitled To
After you’ve made any corrections on your report (or confirmed that there are no problems), you can get your free annual credit report via AnnualCreditReport.com. Doing this can help you monitor your report and learn from any mistakes.
Learning from the past is often very difficult, but if you want to improve in the future, it’s necessary. Then you can avoid that same path going forward.
Get Caught Up On Bills
Making sure you stay up-to-day with your loan accounts and bills is the best way to avoid hurting your credit further, even if you can only pay the minimum amount due.
The good news is that VantageScore 3.0and 4.0 stop looking at loan accounts in collections after the balance has been paid. So doing your best to stay current is crucial to rebuilding your credit.
Stick To Your Budget (And Start An Emergency Fund)
A budget is like a blueprint. And you need a blueprint to build properly. Setting up a budget –and sticking to it — can drastically help you stay financially responsible and avoid things that could hurt your credit score.
A very important part of a budget is an emergency fund. This is money you’ve saved for a “rainy day” — in other words when the you-know-what hits the fan of your life. Your car breaks down. There’s an unexpected repair issue on your house. A loved one needs help financially. All these things are emergencies that you need a fund for.
You should have 2-3 months worth of income set aside in your emergency fund. And you should have this fund full before you even consider applying for credit again. Then you should slowly build it up to a year’s worth of income while you get out of debt.
Use Credit Wisely
Continuing to use credit after a bankruptcy is an important part of rebuilding credit. The key thing is to use credit responsibly. Otherwise, you’ll dig yourself right back into the same hole you were in with bankruptcy.
Using your credit wisely shows lenders and creditors that you can handle debt. The idea here is to counteract the negative items on the bankruptcy with an ocean of positive credit history from this point forward.
So just pay off your debt as soon as you accrue it. You can even consider not using your credit card unless that money is sitting in your checking account, ready to be transferred for the payment.
The best type of credit to get is a secured credit card. The approval rating is nearly 100% because you have to place a security deposit down before getting the credit, and the amount of the deposit is also the spending limit. These are perfect for people who don’t have good credit (also, they look the same as unsecured credit cards on your credit report).
Just Wait It Out
The last tip for rebuilding your credit is to be patient. When recovering from a bankruptcy, it’s important to think long-term. Besides, the bankruptcy will be on your report for 7-10 years, so you won’t be able to fully rebuild until after that drops off.
How Long Does It Take To Rebuild Credit After A Bankruptcy?
If you do all the right things, seeing a difference in your credit score on your journey to rebuilding credit typically takes about a year. It will feel slow, but you’ll get there if you stay disciplined and diligent.
Conclusion
Even though bankruptcy is an intimidating topic, now you hopefully have a better grasp on the different types of bankruptcy, how they can affect your credit score, and how to rebuild your credit after the fact.
When done correctly, bankruptcy can save someone from a financial hole. And when done correctly, that same person can recover after filing for bankruptcy.
About the Author:
John Blakely has had a passion for all things personal
finance for over a decade. He is a firm believer in having big financial dreams
and executing on a plan to realize them. He is an Education Ambassador for ScoreSense, where you can find more of
his writings.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.