Chapter 7 Time Limit

Chapter 7 could be a way to get out of an unmanageable debt burden and potentially improve your credit score. Most of the time, bankruptcy destroys a credit score, but the national bureaus can only report a Chapter 7 for a certain amount of time. Since Chapter 7 lets borrowers off the hook for most debts, the reporting time limit for it is longer than for any other type of bankruptcy.

Identification

The national credit bureaus report a Chapter 7 bankruptcy for 10 years, according to Experian. A common misconception is that the bureaus report bankruptcies from the date the bankruptcy court finalizes the case. Actually, the reporting time period starts from the date that you file bankruptcy. Until the credit reporting period ends, the bureaus report any accounts included in the Chapter 7 bankruptcy.

Dismissed Bankruptcy

You can dismiss a bankruptcy at any time by filing a "motion to dismiss" or the bankruptcy court might file a motion to dismiss if it feels you violated the court's rules, such as not taking the credit counseling session. While a dismissed bankruptcy can be a sign of a good borrower, such as one who wants to pay back debts rather than seek discharge, the credit bureaus still report dismissed Chapter 7 bankruptcies for 10 years. Other dismissed bankruptcies, such as Chapter 13, usually have a shorter reporting period.

Benefits

Bankruptcy might not be all that bad for your credit score. Bankruptcy could even improve your credit score, due to how the bureaus compare borrowers. Instead of comparing bankrupt consumers to all borrowers, the bureaus only compare them to other bankrupt individuals. Thus, after rebuilding your score, your score might drop after the bankruptcy leaves your credit report. Also, the bankruptcy case probably lowers your debt load significantly and eliminates the history on the accounts included in the bankruptcy -- which might contain negative information that does more harm collectively than a single bankruptcy.

Tip

You should always explore every option before filing bankruptcy. Most creditors will offer some assistance to help you avoid becoming totally insolvent. A licensed, nonprofit credit counselor should be your first stop. The counselor might be able to talk creditors into a lower monthly payment or restructure the terms of your loan so you can catch up on bills.