Debtors are well aware that bankruptcy wreaks havoc on one’s credit. Besides a sizable drop in your credit score, the bankruptcy itself appears on your report for about seven years afterwards. Both Chapter 7 and Chapter 13 bankruptcy have this effect, although in different degrees. But that doesn’t mean you’re banned from credit altogether—it just means you’ll have less room to work with. Read on to find out what happens to your credit during and after the bankruptcy process, and how you can cope with the change.
Cause of Bankruptcy
In most cases, a debtor’s credit will already have suffered by the time they file for Chapter 7 or Chapter 13 bankruptcy. They may have missed credit card payments, gotten court judgments, or defaulted on their mortgage. So your credit score at the time of your filing depends on how much debt you had to begin with, and how far behind you were. If you don’t owe that much, ask yourself whether the resulting credit damage is worth it when you can simply settle the debt on your own.
The amount of debt written off also affects how much your credit score will fall after a bankruptcy. If you have a lot of unsecured debt—the kind most commonly written off in both Chapter 7 and Chapter 13—more of it tends to be discharged, and the credit effect may be more drastic. There is usually more debt discharged in a Chapter 7 bankruptcy, which is why people often choose Chapter 13 when they want to save their credit.
Duration of Bankruptcy
In most states, the bankruptcy record stays on your credit report for about seven years. In the case of Chapter 13 bankruptcy, this includes the time you’re making the payments. So if you’re on a three-year repayment plan, the bankruptcy will still be on your record for four years after you’ve made your last payment. But if you’ve stayed current for the entire plan, your credit score can significantly improve after the discharge.
Bankruptcy courts strongly advise against taking out new credit during a bankruptcy filing. Not many lenders will extend credit to someone just coming off a Chapter 7 bankruptcy, and the terms are seldom very attractive to someone handling Chapter 13 payments. You may be able to take out small personal loans from banks specializing in bad credit lending, but make sure you’re dealing with legitimate companies, and read your bankruptcy terms to make sure you’re not breaking any rules.