Nearly every client we meet with wants to know what effect bankruptcy will have on their credit. First, it’s important to understand that your credit score is a history of payments to your creditors and that someone can have both good and bad entries reported. For example, someone could have paid all of their car loan payments on time but have defaulted on a credit card account. Both of these accounts, along with other open and closed accounts, will be used to reach a composite credit score. The amount of open credit, available unused credit, the age of the accounts and various other factors are also used in determining someone’s credit score.
Of course, filing for Chapter 13 bankruptcy or Chapter 7 bankruptcy will reflect negatively on the report. But surprisingly, the amount of the drop in the score is not as great as you might imagine. The reason is that most people that have reached the point of filing bankruptcy have exhausted all other avenues and typically have fallen behind on their credit accounts thereby dropping their credit score. So the negative impact of the bankruptcy filing is not that great and is used by many as the first step toward rebuilding their credit.
Chapter 13 bankruptcy is reflected on your credit report for seven years from the date of the filing of the case and Chapter 7 bankruptcy is reflected on your credit for 10 years from the date of filing. The filing of the bankruptcy is picked up by the credit bureaus, which monitor bankruptcy filings daily, and reported almost immediately.
Does the filing of Chapter 7 or Chapter 13 mean that someone can’t obtain any credit?
No, in fact, depending on your employment, income, reason for the loan, amount of down payment and length of time since the filing of the bankruptcy case, someone can obtain a loan very quickly. In fact, most of our clients rebuild their credit within 1–2 years from the completion of the case and most mortgage companies will consider someone for a loan after 2 years from completion.