People decide to file for personal bankruptcy for a host of different reasons. For some people, bankruptcy becomes necessary when a creditor takes them to court. They want to avoid loss of personal property or the potential garnishment of their wages, and a timely bankruptcy can protect them from aggressive collection efforts.
For others, bankruptcy is a reaction to an unbalanced budget that they simply cannot correct through less aggressive methods. They realize that they have no reasonable plan for fully paying what they owe. Bankruptcy is often someone’s last resort when they realize that they cannot resolve their financial challenges without support.
People put off making that difficult decision for many reasons. Concerns about how bankruptcy can affect someone’s credit report are among the more common reasons that people delay or avoid filing for personal bankruptcy. Yet, the effects of bankruptcy on an individual’s credit are not typically consequential for too long, as long as filers engage in strong repayment and debt-related habits moving forward.
Credit reporting is a temporary issue
People know that they’re filing could very likely decrease their credit score by 200 points or possibly more. They worry about being ineligible for credit after they file. Thankfully, while the immediate effects of bankruptcy on someone’s credit are profound, they diminish gradually over time.
As is the case for all other major credit blemishes, here are rules about how long the credit bureaus can report a bankruptcy. If someone files a Chapter 13 bankruptcy, the record of their discharge remains on their credit report for seven years afterward. If someone successfully files a Chapter 7 bankruptcy, the record of their discharge remains on their credit report for 10 years.
Typically, the impact that bankruptcy has on someone’s credit opportunities begins to diminish as soon as they open new lines of credit after their discharge. Many people can get credit cards within a few months of their bankruptcy discharge. People frequently qualify for car loans and even mortgages within 2 to 3 years of a bankruptcy discharge. They can then establish a new history of on-time payments.
The more effort someone puts into rebuilding their credit score, the faster they may find themselves eligible for more competitive credit terms. Learning about the credit impact a personal bankruptcy filing may have could help someone feel more confident about taking control of their financial challenges.