Credit reports are a fact of modern life. They are consulted every time you apply for a credit card or loan, and for almost any other financial undertaking. Landlords and employers may also consider your credit score. As a result, many individuals considering filing for bankruptcy have questions about how long a bankruptcy filing will stay on their credit report and how it will affect their credit score.

The Length of Time Bankruptcy Will Remain on Your Credit Report

One of the most significant impacts of bankruptcy is how and for how long it will affect your credit score. Bankruptcy generally stays on your credit report for 7 to 10 years after filing, depending on the type of bankruptcy you file.

• Chapter 7 bankruptcy generally remains on your credit report for 10 years after the filing date.
• Chapter 13 bankruptcy generally stays on your credit report for 7 years, as it involves a repayment plan rather than a complete discharge of debt.

During the time a bankruptcy filing appears on your credit report, lenders, employers, and landlords can see the bankruptcy when they pull your credit report. This could impact your eligibility to obtain new credit, rent an apartment, or even secure employment in certain industries. However, the impact of bankruptcy will diminish over time, especially if you work to rebuild your credit after the bankruptcy is discharged. Even though the bankruptcy may remain on your credit report, your credit score can improve with responsible financial behavior.

The Type of Bankruptcy You File Affects How It Is Viewed

The type of bankruptcy you file can affect how potential lenders view its presence on your credit report. Chapter 7 bankruptcy eliminates debt by selling eligible assets. Chapter 13 bankruptcy creates a 3- to 5-year plan to repay a portion of your debt. Most lenders consider a Chapter 13 bankruptcy more favorably than a Chapter 7 bankruptcy.

Bankruptcy Affects Your Credit Utilization Ratio

Your credit utilization ratio also affects your credit score. “Credit utilization” refers to the percentage of your total revolving credit you are currently using. Bankruptcy can affect your credit utilization score, depending on how much of your debt is being discharged and how much credit you still have available.

When you file for bankruptcy, existing credit cards and unsecured loans are often closed and discharged. Because your “available credit” is significantly reduced, any remaining balances can increase your utilization ratio, often significantly.

Credit bureaus generally recommend keeping a credit utilization ratio below 30%. For example, a $500 balance against a credit limit of $1,000 yields a 50% credit utilization ratio, which could damage your credit score. However, bankruptcy can eventually lower your credit utilization ratio by eliminating debt and collections. Because bankruptcy eliminates unmanageable debt, your debt-to-income ratio improves and you can begin rebuilding credit.

How Long Does Bankruptcy Affect Your Credit Score

Bankruptcy will cause an immediate drop in your credit score, but the impact is not permanent.

• Your credit score will drop significantly immediately after filing for bankruptcy. The effect will be noticeable for 6 months to 1 year after filing.
• Between 12 and 18 months after you receive your bankruptcy discharge, your credit score will go up because your debt-to-asset ratio will have improved (i.e., your debt will become much lower compared to your available credit and other assets).
• During the 1 to 3 years after filing, the impact of bankruptcy on your credit score will decrease, as long as you make sound financial decisions. You can continue to improve your credit score by paying bills on time and avoiding further accumulation of debt.
• After 3 to 5 years, expect your credit score to recover. While the bankruptcy filing will remain on your credit report, its impact will be less as you rebuild your credit history.

Rebuilding Your Credit After Bankruptcy

While bankruptcy will affect your credit score, you can begin rebuilding credit as soon as your bankruptcy is discharged.

Pay Bills on Time

After bankruptcy, paying your bills on time is essential to rebuilding your credit. Regular, consistent, on-time payment of utilities, rent, debt, and other expenses demonstrates reliability and will help you rebuild credit.

Apply for a Secured Credit Card

A secured credit card requires a deposit, which serves as your credit limit. You can use the card to make purchases, and making regular payments demonstrates financial responsibility.

Consider a Credit Builder Loan

Some financial institutions offer loans that allow you to make regular payments that are placed in an account that will be made available to you once the loan is complete. These accounts help you build your credit and are a good way to save money for the future.

Get a Co-Signer

If you need to take out a loan, ask a family member or friend to co-sign to guarantee payments will be made. This can allow you to receive credit in situations where a lender would not otherwise approve a loan.

Keep Balances Low

If you obtain new credit cards, maintaining a low credit utilization ratio will improve your credit score. If you have a credit limit of $2,000, a $500 balance is a credit utilization ratio of 25%. Ideally, work to keep your credit utilization ratio below 30%.

Considering Bankruptcy? Contact the Muter Law Office Today.

Being in severe debt can be stressful. Bankruptcy offers strategic legal protection and a fresh start. The bankruptcy attorneys at Muter Law Office advise and represent clients in bankruptcy proceedings. Contact the Muter Law Office today to schedule a free and confidential appointment to discuss your situation and how we can assist you.