Declaring bankruptcy may allow a fresh financial start but it also comes with consequences. Chapter 7 bankruptcy stays on a credit report for at least 10 years, while a Chapter 13 filing will disappear after only seven.
Credit scores drop significantly for the first two years following bankruptcy. After this time, bankruptcy will then have a lower impact on credit scores if the debtor acts prudently. Resolving other bills allows credit scores to rise again but allowing debt to pile up will bring down credit scores. All credit score reports rely heavily on payment history.
Applying repeatedly for credit also lowers scores. Lenders review credit applications in detail by conducting a hard inquiry. Each inquiry deducts two to five points from a score. Applying for five credit cards over a month, for example, constitutes five hard inquiries that can take 10 to 25 points from a score.
Even though bankruptcy harms credit scores, falling deeply into debt without relief may have even greater repercussions. Late payments stay on credit reports for seven years. These remain on reports even with payment of a past due bill. When a creditor gives up on a debt, usually after 120 days, it is sold to a collections agency who reports it to credit bureaus. These debts usually include credit cards, late payment of medical expenses awaiting insurance or long overdue utility bills.
Collection accounts stay on reports for around seven years, starting with the first day of a missed payment. Paying off debt does not remove a collection account from the report but will reduce its negative impact. Foreclosures and repossessions also stay on credit reports for seven years. A foreclosure is counted when a mortgage is 60 to 90 days overdue. Vehicles may also be repossessed because of delinquent payments.
Attorneys can provide options and guidance concerning the feasibility of bankruptcy. A plan may be developed to help deal with debt, protect finances or to stop creditor harassment.