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Bankruptcy and Credit

The amount of consumers that file bankruptcy each year continue to decline since new laws went into effect in 2005 tightening the requirements for a consumer to be able to file. The numbers that still do file, however, are a bit staggering. In 2016 there were 800,000 bankruptcy filings. Statistics show that 60% of bankruptcies are filed because of medical debt. Whatever the reason for filing, a bankruptcy is going to have a very negative impact on a consumer’s credit scores. The question is how much of a negative impact and for how long?

When a consumer files bankruptcy it will most likely be a Chapter 7 or a Chapter 13. There is also a personal Chapter 11 but this one is typically used for businesses. A Chapter 7 will stay on a credit report for 10 years from the filing date. A Chapter 13 will stay on for seven years from the filing date. It is rare that a Chapter 11 would actually show up on a personal credit report since they are normally tied to a business.

The creditors that were included in the bankruptcy, whether it be a 7 or 13, will remain on the credit report for seven years. So in the case of a Chapter 7, it is very likely that the public record will stay on longer than the creditors that were included in the bankruptcy.

When a bankruptcy first shows up as a public record it will significantly damage a credit score, by up to 100 points or more. As time passes it will be less damaging, but it will have some negative impact the entire time it’s there. The creditors that show as “included in bankruptcy” will add to that negative impact as well. One thing to watch out for is that there are a lot of creditors that will continue to report the account every month even after the bankruptcy is discharged. Technically they can do that for seven years, but it makes it harder to recover as far as the credit score goes. When a creditor re-reports an account it brings the reporting date current. So if, for example, a bankruptcy was discharged in 2013 but the creditor keeps reporting in 2017, every time that reporting date updates it brings the bankruptcy status to a current date and will continue to negatively affect the scores. Unfortunately there isn’t a lot that can be done about this. The credit bureaus won’t back date anything. So attempting to get them to change a reporting date back to the discharge date would be a futile attempt. The only way to really “fix” this would be for the creditor to agree to remove the account completely.

The other issue a consumer might encounter is if they have a mortgage and once they file bankruptcy the mortgage ceases to report. There are a number of mortgage companies that will no longer report the mortgage once a consumer files bankruptcy even if the mortgage was not included. Mortgage companies feel that reporting a mortgage after a consumer files bankruptcy is a violation of the automatic stay provided by bankruptcy protection. If they report it, it looks as if they are trying to collect on a dischargeable debt, even though the debt may not have been included which could subject them to a discharge violation.

If a consumer is considering filing for a bankruptcy these are all things that should be kept in mind. The road to recovery after a bankruptcy is a long one. And the credit scores won’t completely recover until the bankruptcy falls off the credit report. Although after a consumer is two years out the damage will begin to lessen. Once the bankruptcy is discharged, the consumer will start with a clean slate. Reestablishing credit and keeping a good pay history going forward is the best way to begin the rebound from the damage of the bankruptcy. Filing for bankruptcy will at the onset do significant damage to a credit score….but the damage is not permanent.

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