How is credit affected by bankruptcy?

How your credit will be affected if you file Chapter 7 or Chapter 13 is one of the most common concerns of a person in financial difficulty.

To answer this you need to understand that any reported event that occurs pertaining to how you repay your debts becomes a part of your credit record. An event remains on your credit report for seven years and then it is removed. This includes the filing of a Chapter 13. Chapter 7 has a special reporting period of ten years.

The next thing to understand is that good credit is paying what you owe when it is due. Anything else is less than good. If you are in financial difficulty, for whatever reason, the chances are your credit report is already bad, or will soon be bad, even if you have had good credit all your life. Since your credit is probably already substantially impaired, the filing of a bankruptcy may be the best thing or perhaps even the only thing you can do to begin to reestablish your good credit.

Upon completion of a Chapter 13 you have repaid all of your debts or repaid them to the best of your ability and are now out of debt. Since you have demonstrated your ability to live on a budget and pay your debts, and you are now debt free with available income, your chances of reestablishing credit are good. Many persons prefer to avoid credit after having lived on a cash basis during repayment in a Chapter 13.

Filing a Chapter 7 has a different effect on your credit. Once you file a Chapter 7 you cannot do so again for a period of eight years – in other words, the Chapter 7 remedy is available only every eighth year. Since after Chapter 7, you don’t have any debts, because they have been discharged, and you can’t file Chapter 7 again for eight years, you may be in the best credit posture that you have had for some time. You have the opportunity for a fresh start.

The best attitude toward credit after bankruptcy is to expect the worst but strive for the best. There usually is a light at the end of any tunnel.

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