Bankruptcy offers relief to people that have fallen on hard times and are struggling to keep up with their debt payments and other expenses. Though bankruptcy can be the best option in some situations, it’s important to understand the potential consequences on your credit reports so you can make informed financial decisions.
When is a bankruptcy removed from your credit report?
The time it takes for a bankruptcy to fall off your credit report depends on the type of bankruptcy you file. A Chapter 7 bankruptcy is typically removed from your credit after 10 years, while Chapter 13 is removed after seven years.
Though bankruptcy stays on your credit reports for up to a decade, its effects diminish over time. For example, a bankruptcy from nine years ago may have less of an impact on your credit scores than one from a year or two ago. Even if your bankruptcy occurred more recently, practicing good financial habits will give you a headstart on rebuilding your credit scores.
Chapter 7 bankruptcy
Chapter 7 is a type of bankruptcy that helps those in dire financial situations discharge some, if not all, of their debts in as little as four months. Chapter 7 is generally for those with low incomes who cannot repay their debts without facing severe financial hardship. Debts discharged under Chapter 7 bankruptcy include unpaid credit card balances, medical debt and personal loans.
Getting debt relief under Chapter 7 involves submitting a petition to your local bankruptcy court and paying the filing fees. Once you submit the petition, your creditors must immediately cease collection efforts of your debts, known as an automatic stay. Even if you file for bankruptcy, you may still be on the hook for certain debts, such as child support, alimony, student loans and back taxes.
Chapter 7 bankruptcy requirements
To file for Chapter 7 bankruptcy, you must:
- Pass a means test: You must pass a means test to prove you cannot make payments on your debts, even partial payments. The means test looks at your household size and disposable income — the money left over after all your expenses are paid. If your disposable income is above the threshold, the courts will deny your Chapter 7 application. If your income is too high to file Chapter 7, you may still be eligible for Chapter 13.
- Take a financial counseling course: You must take a financial counseling course within 180 days before filing for bankruptcy at an approved credit counseling agency. During the session, a counselor will review your financial situation and determine if bankruptcy is truly necessary. You can find a list of approved credit counseling agencies on the Justice Department website.
- Have no recent bankruptcies: You are ineligible for Chapter 7 bankruptcy if you’ve filed Chapter 7 in the past eight years or Chapter 13 in the past six years.
Chapter 13 bankruptcy
Chapter 13 restructures your debt to give you more flexible terms, such as lower interest or a longer repayment period. Chapter 13 is best suited for people with steady incomes who could pay off their debt with a little extra time. The plans are typically 3 to 5 years, and the remainder of your debt is forgiven once you complete the plan.
Filing for Chapter 13 involves attending a financial counseling session with a nonprofit credit counseling agency and working with an attorney to submit the necessary paperwork. This includes a proposed payment plan detailing how and when you will repay your debts. Chapter 13 stays on the public records section of your credit report for seven years.
Can you get a bankruptcy removed from your credit report?
It’s almost impossible to remove a bankruptcy from your credit reports. You must wait 10 years for chapter 7 or seven years for chapter 13 to fall off your credit. In the rare event that a bankruptcy was filed under your name by mistake, you can dispute it with the credit bureaus to try and get it removed from your credit reports.
The impact on your credit scores
While filing for bankruptcy might be the best option for your specific financial situation, the impacts on your credit scores can be severe and long-lasting. This is because your credit score measures how well you manage debt, and declaring bankruptcy looks risky to potential lenders.
According to FICO, if you have very good or excellent credit before filing, you may see a massive drop in your scores compared to someone who already has several negative marks on their credit.
How to rebuild your credit after bankruptcy
Bankruptcy won’t affect your finances forever, but repairing the impacts on your credit will take time. Here are some steps to help rebuild your credit after bankruptcy.
Manage your income and expenses
You likely got into debt because your expenses exceed your income. If this is still the case, you’ll need to find ways to lower your bills or earn more money. If bankruptcy wiped out all or most of your debts, it may afford you wiggle room to get caught up and start building an emergency fund. Creating a budget can help you identify bills to cut and how much you can afford to save each month.
Pay your bills on time
Once you’ve had your debt restructured or discharged through bankruptcy, paying your bills on time can help repair your credit and avoid falling back into a cycle of debt. Payment history makes up 35% of your FICO credit scores and around 40% of your VantageScore credit scores, and late payments can stay on your credit reports for up to seven years.
Get a secured credit card
A secured credit card can help rebuild your credit after bankruptcy, as long as you manage the card responsibly by keeping your credit utilization low and making on-time payments. Secured credit cards function just like regular credit cards, except they require a security deposit. Some secured cards don’t require a credit check, so you may be able to get approved with a low score.
Consider a credit builder loan
With a credit builder loan, you make monthly payments to a lender that are reported to the credit bureaus. Paying your loan on time typically reflects positively on your credit reports and builds your score over time.
A credit builder loan differs from a traditional personal loan because you don’t receive money upfront. Instead, you make small payments over time — typically six to 24 months, and don’t have access to the funds until you complete all the payments. Only consider a credit builder loan if you know you can afford the payments because paying late will harm your credit score.
Frequently asked questions (FAQs)
Unless the credit bureaus reported the bankruptcy inaccurately, you must wait 10 years for Chapter 7 to be removed from your credit report. Thankfully, the negative impacts on your credit fade over time. If you hit the 10-year mark and still see the bankruptcy on your report, contact the credit bureaus (Experian, TransUnion and Equifax) to have them remove it.
Your credit score may not immediately go up once a bankruptcy filing is removed from your credit report, as it depends on how well you’re managing your debt currently. If you want to boost your chances of a credit increase, focus on paying your bills on time and keeping your credit balances low.
This will depend on your current credit scores and how many negative marks you have on your credit reports. FICO says that someone with a credit score in the mid-700s can expect a drop of 100 points or more. If you had a high score before bankruptcy, you might experience a more drastic drop. On the other hand, bankruptcy may not affect your credit as much if you already have low scores.
