How long does bankruptcy stay on your credit report?

Bankruptcy is a legal process that can stay on your credit report for seven to 10 years. Long after debts have been paid off and discharged, their remnants can still send credit risk “red flags” to future lenders. (Just a heads up: If you’re concerned about bankruptcy, it’s always always best practice to consult a bankruptcy attorney to evaluate your individual situation and options).

Market Watch reported that 181,000 bankruptcy cases were filed by May 2021. Not having the proper financial foundation to pay back loans will leave you in debt that can be difficult to recover from, but it’s possible to bounce back.

Bankruptcy laws were created to give those that suffered financial setbacks a chance to start over. There are six types of bankruptcy, but the two most common types are Chapter 7 and Chapter 13. It’s important to understand each type, the application processes involved, and how they will affect you.

How do bankruptcies work?

The type of bankruptcy that you qualify for will determine how your debts are paid back and how much time you have to do so. Income is a primary factor in deciding to file Chapter 7 or Chapter 13.

For example, when filing for Chapter 7, you must meet the appropriate income requirements and pass The Chapter 7 Means Test. This type of bankruptcy involves liquidation of assets to pay back a portion of the debt. On the other hand, Chapter 13 bankruptcy is a reorganization of assets. The debtor has enough income to repay a pre-set amount via monthly payments.

Chapter 7 bankruptcy

When Chapter 7 bankruptcy is filed, an order called an "automatic stay" is issued. This is an injunction that prevents creditors, collections agencies and government entities from pursuing collections on exempt property. Items include evictions, foreclosures, and contempt of court for alimony or child support.

Chapter 7 is a liquidation of assets that wipes out most of the debtor's general unsecured debts (credit cards and medical bills) without paying back the balances. This type of bankruptcy works best for those with low income or little to no assets. A trustee is assigned to the case that looks at documents and sells off non-exempt property (e.g. expensive vehicles) to pay back the debts. If there’s no property to be sold, then the creditors receive nothing.

Chapter 7 can remain on a credit report for as long as ten years before it drops off. If you ever find yourself back in financial trouble after filing for Chapter 7 bankruptcy, there is an eight-year waiting period from the original filing date to reapply.

Chapter 13 bankruptcy

Chapter 13 is bankruptcy for people that make enough income to pay back to creditors through specialized monthly payment plans. Considered a "reorganization," you can keep all your assets but you have to pay an equal amount for the non-exempt property (some lenders look a little more favorably upon Chapter 13 bankruptcies because of this).

Individuals that can file for Chapter 7 usually opt for Chapter 13 because of the benefits that come with it:

the ability to catch up on past missed payments such as mortgages, lien, or car payments.
non-discharged debts such as alimony or child support can be paid off in three to five years.
if an account was delinquent during the bankruptcy, it will be deleted seven years from its original delinquency date.

With Chapter 13, you agree to pay off all debts within a three-to-five-year timeframe. Once paid off, the negative items fall off all credit reports within seven years of the filing date. Bear in mind, declaring bankruptcy does not alter the original delinquency date or extend the time the account remains on the credit report.

How to raise your credit score after bankruptcy

Once a bankruptcy is discharged, raising your credit score is the next goal. Most people know the harmful impact bankruptcy can have on your credit, so trying to recover can feel like a daunting process. But with some effort and the proper steps, you can make a real difference and start to see improvements.

1. Review your credit reports

When the bankruptcy period is over, make sure to get a copy of your credit reports from each major credit reporting agency (Experian, Equifax, Transunion) and review them. You’ll want to confirm that the correct accounts are now listed with a zero balance and have a note about being discharged.

Also, make sure each account has accurate open and close dates, as these are the dates that start your seven- or 10-year countdown before accounts can fall off your credit report.

2. Start a budget

Bankruptcy can happen for many reasons, but the important thing is learning from your mistakes so you don’t end up in the same situation again. One habit that will help you stay on top of your finances is setting and sticking to a budget.

A budget can help you understand how much money you have to spend, where you’re spending and where you can cut back. Additionally, regularly reviewing your budget allows you to quickly see when you’re overspending and make a plan to adjust so you don’t spiral into debt.

3. Create an emergency fund

People file for bankruptcy after finding themselves in a situation where they have debts and no way to pay them. The lesson here is that emergencies and unexpected debts always happen, and it’s best to be prepared as much as possible.

An emergency fund can help with just that. Most financial experts recommend building up an emergency fund to cover three to six months’ worth of expenses, so if you ever find yourself without a job or with higher-than-average bills, you have a way to pay them.

Don’t worry — three to six months may sound a lot, but you can give yourself time to build this fund up. Set up a realistic amount to set aside every month and watch your fund grow.

4. Rebuild your credit with a prepaid or secured card

After filing for bankruptcy, you’ll notice most lenders and creditors are often unwilling to give you unsecured credit. You’ll need to work on rebuilding your credit so lenders can see enough improvement to trust you again.

One way to rebuild credit is by using a prepaid or secured card. Both options allow you to only spend the money you already have, while the activity on these cards will be reported to the credit bureaus and help you build your credit again.

5. Watch your credit utilization ratio

Your credit utilization ratio is the amount of credit available to you versus the amount you use every month. This ratio makes up 30 percent of your credit score, so it has a significant impact on your credit. Experts recommend keeping your credit utilization ratio below 30 percent at all times. This means if you have two credit cards with a $2,000 limit on each, you shouldn’t spend more than $600 on those cards monthly.

Make a point of tracking your credit utilization ratio in your budget. If you find yourself exceeding the recommended 30 percent, find a way to lower spending or increase the credit available to you.

6. Never miss a payment

A significant portion of your credit score is made up of your payment history — 35 percent to be exact! You can keep your credit score on track by making sure you never miss a payment.

Put all the bills you can on auto-payments. For everything else, set reminders in your phone to make sure you pay on time. Also, try to pay in full whenever possible. If you can’t pay the entire balance, paying the minimum is an absolute must.

7. Consider becoming an authorized user on a credit card

If you have a friend or family member willing to help you rebuild your credit, ask to become an authorized user on their card. If they have good credit, you’ll benefit from their responsible credit transactions without having to do any work yourself!

However, note that this is a big request, as the person has to trust you not to abuse the access and ruin their credit. Similarly, you want to really know that this individual is good with credit, because if they act irresponsibly, it can damage your credit further.

How long can bankruptcy affect your credit score?

Bankruptcy can affect your credit score for some time. Chapter 7 can remain on record for as long as 10 years. Chapter 10 and other forms of bankruptcy are expected to fall off in seven years.

If you're careful, the negative impact will diminish over time. This means that your credit will improve while you're still making payments. Be sure to submit payments in full and on time (we can’t say this often enough. Yes, we know it’s obvious. We’re sorry we keep repeating ourselves).

Can you file for bankruptcy more than once?

You can refile for bankruptcy multiple times, but a discharge can only be obtained after a determined waiting period. If you file for Chapter 7, you must wait eight years from the original date of the first case. You can file for Chapter 13 within four years of completing a Chapter 7 case.

If your original case was Chapter 13, you can refile or apply for Chapter 7 without a waiting period, as long as the original debt was discharged. If the requirements aren't met, then you must wait six years before refiling.

A recent study by Debt.org found that 8 percent of those who filed for bankruptcy had filed at least once before. If the request is accepted, the court requires you to prove why the case will be successful. This is in accordance with The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which prevents fraudulent people from compulsively refiling.

How to take a bankruptcy off your report

If you have an incorrect bankruptcy on your credit report, you’ll need to act quickly to have it removed before it does any more damage to your credit. You’ll need to file a dispute with the credit reporting agencies and ask for the bankruptcy filing to be removed from your account. If you need help with the dispute process, consider using the credit professionals at Narrow Path Consulting, who can file a dispute on your behalf.