How long can bankruptcy affect your credit score?

On Behalf of | May 27, 2024 | debt relief |

One of the many reasons that people avoid personal bankruptcy is concern about what it may mean for their credit. Their current financial struggles may have damaged their credit, but they worry that bankruptcy could do irreparable damage. Bankruptcy does have a strong negative impact on an individual’s credit score and could theoretically affect their credit opportunities for many years after the completion of the bankruptcy process. It is standard for someone’s bankruptcy to cause their score to drop by roughly 200 points.

Their credit score may begin improving slowly as they make responsible use of credit after the completion of a bankruptcy. However, the record of their discharge shows up on their credit report every time an employer or lender looks at their credit history.

Each type of bankruptcy has different rules

There are multiple different forms of bankruptcy available, Each of which has different requirements and offers different benefits. A Chapter 7 bankruptcy can be a relatively quick process, but it may sometimes lead to the liquidation of certain assets. People have to exempt their property or use some of their resources to reduce their debts.

Chapter 13 bankruptcy is a bit slower, as people have to complete a repayment plan. However, that they don’t have to worry about liquidating their assets during the process. Those are the most common forms of bankruptcy for individuals, and each may show up on a credit report for a different amount of time.

A Chapter 7 bankruptcy can show up on a credit report for 10 years after someone’s discharge. A Chapter 13 bankruptcy comes off of someone’s credit reports seven years after their discharge. The difference in the timelines helps account for the multiple years spent making structured payments to creditors. Even though the bankruptcy may turn up during a review of someone’s credit history, it has less of an impact the more time passes.

People with questions about personal bankruptcy, including what it may do to their credit, could benefit from learning more about the process. Understanding credit reporting rules could help someone choose the right form of bankruptcy given their circumstances.