How Do I Handle Bankruptcy on My Credit Report?

There are two key ways that you need to handle bankruptcies on your credit report. Both of these involve tackling the bankruptcy head on instead of attempting to hide from it. One silver lining in a bankruptcy is that it erases your delinquent and outstanding account balances.

Your credit report will display $0 balances on any accounts that were successfully discharged via the bankruptcy. 

First Action – Check Your Credit Report

The first action is to ensure that your credit report correctly reflects these effects of your bankruptcy. Sometimes creditors will stubbornly keep reporting the negative account information even after your bankruptcy discharge. This is why you need to routinely check out your credit report. 

You can use a free third party credit report/score service like Credit Karma or Discover It to do this as often as you like. Checking it at least once a month in this situation is a good idea. 

It will not cause you any hard credit inquiries.

Should you find out that one or more of your creditors are showing discharged debts as active (with balances outstanding), then you need to talk with the appropriate credit reporting bureau right away. A more proactive approach is to send every agency copies of your discharge as soon as you receive it. This will alert them to the fact that they are not to report additional information on all included accounts. 

When you do come across reporting errors, you are within your rights to send out disputes to the three credit bureaus. They must address them within 30 to 45 days.

Second Action – Check Your Non-Discharged Accounts

The second action to take is to continue paying all of your non-discharged accounts on time. Not every one of your accounts will fall under the discharge order. Student loans are one prime example that can not be discharged. These active accounts will keep affecting your credit score, so be sure to pay all existing accounts and loans in a timely fashion. 

Just because an account does not yet show on your credit report is not a good reason to ignore it. Should you fall behind on payments, the accounts will be reported to the bureaus and appear tragically as if by magic. Your overarching goal is to let creditors see that your financial problems are in the past. 

Will Bankruptcy Clear all of My Debts?

The reason you may seek to file bankruptcy is to clear away your debts that you can not pay. Whether or not this will happen depends on the type of bankruptcy for which you are approved.

A discharge does release you from all personal liability of the debt. It also stops the creditor from continuing to pursue collection activity against you. Under such a discharge you are not required legally to repay these debts. 

Some debts can not be discharged completely. Liens that are not addressed during the bankruptcy case stay in force. Secured creditors are able to enforce these liens so that they can reclaim the secured property. 

A car payment is a good example. If you do not commit to a reaffirmation agreement on your car payment, the debt discharge would erase your obligation to pay back the loan. You would not be able to keep the car in such a scenario as the lender would have lien rights to repossess it. 

In the vast majority of cases, if you file a Chapter 7 bankruptcy and it is approved by the judge, then you will obtain a debt discharge at the conclusion of the case. 

The Chapter 7 process generally gives this discharge 60 days following the Meeting of Creditors (according to 341(a) statute requirements). This usually means that you would get your discharge around four months after you file your original petition for a Chapter 7 bankruptcy.  

It is important to know that Chapter 13 bankruptcy will not clear all of your debt. Instead it would make repayment arrangements that stretch from three to five years long. 

How Much Will Bankruptcy Hurt My Credit Report?

Chapter 7 bankruptcy will impact your credit report for a full seven years. Its effects vary based on how high your credit score is when you file.

FICO released case specific information back in 2010 on how bankruptcy will impact your personal credit score. In two scenarios, they revealed that a person with a 780 credit score could lose as much as 240 points while another with a 680 credit score could lose up to 150 points. 

The person with the higher score suffers a greater point loss. Both cases have your credit score settling at approximately the same level of 540 and 530. Should credit issues have already dragged your score down into the 500’s, then your score has already been negatively impacted to a large degree and you have less to lose. 

These are only examples. Your score could suffer less or even a little more depending on your personal credit and debt circumstances when you file for bankruptcy. 

FICO does not distinguish between Chapter 13 and Chapter 7 bankruptcies which cover personal debt discharge. 

It is worth noting that Chapter 7 ends fastest in only a matter of months following filing if you qualify. Chapter 13 bankruptcies take years to exit from as they involve from three to five years plans of repayment.