There are many benefits associated with a successful personal bankruptcy. However, many people experiencing financial hardship focus more on the negative consequences of bankruptcy than the positive results. They worry about losing their revolving lines of credit and facing a massive reduction in their overall credit scores.
Frequently, people delay filing for bankruptcy out of concern about how the record of their case could affect their future credit opportunities. Most people recognize that they need access to financing to buy a vehicle or a home in the future. They may rely on revolving lines of credit to make regular expenses more manageable.
Thankfully, the credit impact of bankruptcy is a temporary issue. How long does bankruptcy impact a filer’s opportunities for credit?
Credit reporting is a temporary consequence
The three credit bureaus provide insight into an individual’s financial circumstances. They report on open lines of credit, current balances, missed payments and major issues, including bankruptcy. Most credit blemishes only appear on credit reports for seven years. The rules are slightly different for bankruptcy.
How long the bureaus report a discharge depends on the type of bankruptcy. A Chapter 13 bankruptcy requires a multi-year repayment plan. As such, the eventual discharge is only reported to the credit bureaus for seven years, much like any other credit issue.
Chapter 7 bankruptcy is much faster and does not involve a structured repayment plan. The credit bureaus can report a Chapter 7 discharge for 10 years. Eventually, the record of the bankruptcy is no longer visible to lenders, employers and others performing credit checks.
Bankruptcy’s impact declines over time
Most people find it very difficult to secure credit in the first year or so after a bankruptcy discharge. Many filers struggle to secure revolving lines of credit, although secured credit cards may be an option.
However, within a few years of discharge, the impact of the prior bankruptcy decreases substantially. Especially if filers build a history of making payments on time, they could be eligible for credit cards, car loans and even mortgages within a few years of the bankruptcy. The record of the bankruptcy does not need to come off a credit report for an individual to qualify for credit opportunities.
Learning more about the rules that govern bankruptcy and credit reporting can be beneficial for those struggling with debt. A bankruptcy filing does drag down a person’s credit score, but they can ultimately improve their credit by eliminating debts and replacing multiple credit blemishes with the record of a single bankruptcy discharge.