Explaining Bankruptcy and How Long it Stays on Your Credit Report

  • By David Lukic
  • Published: Aug 24, 2020
  • Last Updated: May 31, 2023

No one wants to go bankrupt, but when you get in over your head and can’t see a way out, sometimes there is no choice. Bankruptcy is a process where the federal courts allow you to reduce or eliminate your personal or business debts. However, filing for bankruptcy can have long-term effects on your credit report and many people don’t really understand how bankruptcy works

What is Bankruptcy, and How Does It Work?

Chapter 7 bankruptcy

Bankruptcy is an admittance that a debtor cannot repay their debts. The practice attempts to help creditors and debtors manage their losses using the latter’s current assets. It’s a long and complicated process, and it is best to hire an attorney to help you through it.

There are six types of bankruptcy filings, known as “Chapters,” available in the US code. Chapters 7, 11, and 13 are the most commonly used since the others are reserved for industry specific or international cases.

The first item is you must prove unequivocally that you cannot repay your debts. You may also have to complete credit counseling with a government-appointed credit counselor. During this part of the process, you might find alternatives to bankruptcy, and the counselor will help you work out a personal budget plan to repay your debts. 

The next step in the process is to decide which type of bankruptcy to file. You can choose Chapter 7 or Chapter 13. Both types will help you avoid foreclosure, eliminate your debts, and stop debt collection, wage garnishments, and utility shut-offs, but there are some differences too. 

What is Chapter 7 Bankruptcy: What Happens When You File it?

Chapter 7, bankruptcy is the most common type used by individuals. It is also called “straight” or “liquidation” bankruptcy. With Chapter 7 bankruptcy, you are appointed a federal court trustee who oversees the sale of your property. You may be allowed to keep some personal belongings and your car as well. The general process of undergoing a straight bankruptcy goes as follows:

The first step is going through credit counseling. The sessions must occur six months before filing at the earliest to ensure an accurate assessment of the debtor’s financial situation. However, if no agency is available in their immediate area, it’s possible to skip this step.

Next, the applicant must hand over forms detailing their situation. This includes any debt-related documents, asset ownership, proof of income, and current expenses. For Chapter 7 bankruptcy, applicants must fall below the median income line for their state or prove they lack enough disposable income to repay their debts.

Once creditors review these documents alongside a court-appointed trustee, a state of “automatic stay” goes into effect, which stops creditors from going after the applicant.

Finally, the debt repayment process begins. The trustee decides which of the applicant’s assets and finances fall under “exempt” and “non-exempt” property. As a rule, anything required to maintain a minimum standard of living is spared from liquidation. This often includes the following:

  • Modest Vehicles
  • Necessary Clothing
  • Necessary Furniture
  • Food Appliances (Refrigerators, ovens, etc.)
  • Professional Tools of the Trade
  • Public Benefits (social security, unemployment, etc.)

In most cases, after liquidating all the non-exempt assets, the court discharges the remaining debt. While this prevents creditors from antagonizing the applicant, it doesn’t stop government agencies from collecting recurring or outstanding debts.

How Long Does Chapter 7 Stay on Your Credit Report?

The proceeds of the sale go to paying back your creditors, and the rest of the debt is discharged. The negative impact of filing for Chapter 7 is immense as it stays on consumers' credit reports for 10 years under the Fair Credit Reporting Act (FCRA).

Bankruptcy remains for so long because it’s one of the most significant events creditors use to determine a person’s creditworthiness. Credit bureaus mostly watch for patterns in an individual’s behavior, but there is no single event with greater weight than filing for bankruptcy.

From a lender’s point of view, every case of bankruptcy is like having money stolen. They lent the account holder money, but a portion of that money was never returned.

The courts mitigate the damage to creditors by preventing people from using Chapter 7 as a “get out of jail free” card. If you get into trouble again, you cannot file for Chapter 7 again for eight years.

What is the Effect on Your Credit?

There are a lot of negative consequences of filing for bankruptcy. With Chapter 7, you can lose your house, your cars, jewelry, and other family heirlooms. Plus, Chapter 7 stays on your credit report for ten years! 

What Will the Credit Score Be After Chapter 7?

Filing for bankruptcy can drop your credit score by 200 points overnight. Lenders may not extend you any new credit because of it. You might have trouble getting credit cards, auto loans, and other financing for years. If you are able to get financed, you will probably have to pay higher fees and higher interest rates. It is near impossible to apply for and get approved for a mortgage until the bankruptcy cycles off your credit report. 

Even though the balances show as “discharged,” they will still show up on your credit report as a debt that was affected by bankruptcy. 

What is Chapter 13 Bankruptcy?

With Chapter 13 bankruptcy, you don’t have to sell your home, but in exchange, you will have to repay some of your debt. Applicants must go through credit counseling to be eligible for Chapter 13 bankruptcy. Afterwards, the courts allow your attorney to negotiate a wage-earner’s plan under either a three or five-year repayment plan. 

Unlike Chapter 7 filings, Chapter 13 bankruptcy does not have income standards for applicants. It is available to any individual(s) whose debt falls below $419,275 for unsecured debt and $1,257,850 for secured debt.

Applicants reorganize their finances under court supervision. Typically, debtors work with a court trustee to consolidate their debt into one monthly payment, which is distributed to creditors by the trustee. The amount is calculated to maintain basic living expenses but usually involves paying back a substantial part of the balance.

After the repayment plan has ended and you have paid the portion that you agreed to, the rest of your debt is discharged. Because you pay back some of your debt, this may be a better option for some. In addition, you get to keep your home, and if you need to, you can file Chapter 13 again after only two years. 

How Long Does Chapter 13 Stay on Credit Report?

With Chapter 13, the bankruptcy may only stay on the credit report for seven years, but that is still a long time to carry the stain of bankruptcy on your credit. Plus, if someone cosigned a loan for you, they may now be responsible for that debt.

What Debts Can’t be Dismissed Through Bankruptcy?

What Will the Credit Score Be After Chapter 7

Bankruptcy can be a life-saving tool for people in hopeless situations. Although the practice advocates for a “fresh start,” it can’t wipe away all debts and payments.

Most non-dischargeable debts involve case-by-case court rulings, punishments, or taxes. Some examples include:

  • Continuing alimony and child support
  • Debts incurred from willful and malicious injury to a person
  • Debts incurred from bodily harm caused by alcohol-impaired driving
  • Outstanding income tax
  • Unlisted debts during the bankruptcy filing

When to File for Bankruptcy?

Bankruptcy exists as a last resort. It’s to help people get a fresh start when they’re being crushed by debt with no way out. Extreme family troubles or unavoidable medical expenses usually bring on these situations.

The damage to your credit score and reputation after filing for bankruptcy is no small matter. Anyone considering this process should ensure they’ve exhausted all other options beforehand. Some alternatives include the following:


Forbearance is a contract between the creditor and debtor to withhold collecting on an outstanding debt. The practice is most commonly used for more significant balances like student loans, mortgages, or vehicular loans.

The contract terms can vary depending on the debtor’s situation. Some suspend payments while continuing to accrue interest, while others temporarily reduce the minimum payment. During COVID-19, many lending agencies created forbearance policies due to increasing job volatility.

Despite being a short-term solution, forbearance can give you time to get your life back on track without resorting to bankruptcy.

Debt Settlement

Something is better than nothing. Sometimes creditors have to swallow that hard truth when dealing with defaulted debts. Bankruptcy proceedings can be a long and expensive process for creditors, and it may be better for them to work directly with you instead of through the courts.

Debt settlement may allow you to pay significantly less than what you owe. It would help if you only approached creditors you’ve defaulted on payments with for multiple months. To have negotiating power, you must prove you’re unlikely to pay back the total amount.

Once you’ve settled on an amount to pay back, the creditor covers the rest of your balance. That remaining balance is considered part of your income and must be included in your tax filings.

Offer in Compromise

If you’re having trouble paying taxes, then consider an “offer in compromise” rather than filing for bankruptcy. The IRS started this program to help struggling families while still receiving partial payment. Think of it as a formal debt settlement method directly with the US government.

Check the “Offer in Compromise Pre-Qualifier Questionnaire” on the IRS website to see if this is an option for you. If you’re not eligible, then contact the IRS directly and ask about an installment plan.

How to Avoid Bankruptcy?

When you feel the pressure bearing down on you from your overwhelming debts, bankruptcy may seem like a quick fix, but it might be better to pause and look at alternative options. Although you might suffer some short-term adverse effects, your credit may be better in the long run. Some alternatives to bankruptcy are:

  • Credit counseling - you can request a government-appointment credit counselor to help you sort things out. They are professionals and might think of solutions you haven’t even considered.
  • Debt consolidation - banks offer consolidation loans that pay off your high-interest debts and combine them into one, low-interest, affordable monthly payment. This option can be a lifesaver for some people and certain situations.
  • Debt management - you can hire a professional debt management agency or contact your lenders yourself to negotiate better interest rates and terms. Rather than have their account discharged in a bankruptcy, they may be willing to work with you so that they eventually get paid. 

Remember though; if you fail to pay your debts on time (even during negotiation of a better situation), your credit rating may suffer. These options, however, could be a better fit for some. Your credit score may rebound much quicker from the effects of a few late payments rather than a catastrophic bankruptcy

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