Does Filing Bankruptcy Hurt Your Credit?

A bankruptcy filing will definitely hurt your credit for a significant period of time and should be thought of as the method of last resort when dealing with overwhelming debt problems. Filing bankruptcy will stay on your credit report for 10 years after the debts are discharged and will reduce the likelihood of getting credit. It could keep you from buying a house, getting life insurance or in some cases even getting a job.

However, for some people filing for bankruptcy is the only option when faced with a financial crisis. For someone drowning in debt due to a job loss, illness or other major setback, their credit rating can only get worse until they do something to stop it. Filing bankruptcy may be the only way out of a continually worsening situation.

There are two types of bankruptcy, Chapter 13 and Chapter 7. Chapter 13 lets people with a steady income keep property like their home and car. People filing Chapter 13 will make payments they can afford to the bankruptcy trustee for three to five years. The trustee pays the creditors and at the end of the scheduled payment plan, the debts are discharged.

In a Chapter 7, all debts are discharged immediately, but the debtor is only allowed to keep a few exempt assets. All other assets are sold and monies are dispersed to creditors right away.

In either Chapter filing, once the debts are discharged, they can no longer continue to damage your credit report. The bankruptcy itself will be a large negative mark on the credit report. However, from the moment the debts are discharge, your report can only get better.

Pre-discharge counseling is required by the bankruptcy court and will give debtors a better idea of how to build their credit back up the right way and avoid any future financial crisis due to bad debt management.

For those in financial crisis, bankruptcy can give them a clean slate. Their credit rating may drop, but they can build it back up on a solid foundation with smart debt management.

If you are responsible, you can re-establish your credit score over the 10-year period. Use credit only to improve your rating, and never as a means to live above your means. Once the bankruptcy drops from your credit report after that time period is up, you could have an excellent credit rating.