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How Does Bankruptcy Affect Your Credit?

Millions of Americans are swamped with overwhelming amounts of credit card debt. High-interest credit card debt can interfere with several aspects of life, from financial to future plans. When faced with this burden, falling behind on payments isn’t unusual. Unfortunately, that leads to pressuring phone calls from debt collectors, and for many families, they feel their only option is bankruptcy.

While bankruptcy might seem like an easy option to leave behind your past spending mistakes and start fresh, this financial venue can cause significant problems for you in the future. One of those problems is your credit report. You might be aware that your credit score will suffer when filing bankruptcy, but do you understand the full ramifications on your future?

Filing for bankruptcy might end those pesky creditor calls, but it will also have a drastic impact on your personal and financial future. There are two basic types of bankruptcy, Chapter 7 and Chapter 13. Both have lasting effects on your credit report

Chapter 7

To pay off creditors, individuals filing Chapter 7 bankruptcy will be assisted in liquidating and selling their non-exempt assets. Most unsecured debt is legally discharged. Yet, there are certain assets and debt not included in this type of bankruptcy. These include student loans, alimony, child support, mortgage and reaffirmed debt, to name a few. Chapter 7 bankruptcy stays on your credit report for up to seven years.

Chapter 13

With Chapter 13 bankruptcy, a court-enforced repayment plan will be available. The court will approve the plan, and payments will be made through an appointed individual. You retain assets as long as payments are made as agreed. Usually, the repayment schedule lasts from three to five years. This type of bankruptcy will stay on your credit report for up to 10 years, which makes acquiring any new loan almost impossible.

Long-Term Consequences

Choosing bankruptcy is not an easy decision to make. Unlike debt management plans or credit counseling, there are long-term consequences that go along with filing. Bankruptcy becomes a part of public record, and filing can take years. Depending on which type you choose, you could be forced to sell assets and possessions that are important to you. With both types of bankruptcy, your credit score will drop significantly, ranging from a 100 to 200 point decrease. This could mean your score could go from a good rating to fair or even poor. Also, the negative mark will stay on your report for years, making credit approval incredibly difficult. You won’t be able to purchase a car, house or even open a credit card as easily as you would have before filing. Also, your interest rates will skyrocket after filing for bankruptcy. It could take years, or even decades depending on which bankruptcy type you choose, before banks and credit card companies offer you loans at favorable interest rates. This is a huge sacrifice, considering our dependency on credit lines.

Alternative Options

Before considering the drastic step of bankruptcy, you should explore all financial options, including credit counseling and debt management programs. Working with a credit counselor can help you find your way out of debt, without significantly damaging your credit report for many years. Also, the counselor with work to teach your healthy spending habits, so you don’t find yourself in the same position in the future. Contact one of our certified credit counselors today to discover your monetary options and find out if bankruptcy is the right route for you.

Still considering bankruptcy? Be sure to read the risks of bankruptcy, aside from significant damage to your credit report.

What is Bankruptcy?

Risks of Bankruptcy

Types of Bankruptcy

When Should You File?

How to Rebuild Credit after Bankruptcy

Bankruptcy Fact vs Fiction