Effects of Chapter 7 Bankruptcy on Credit

Chapter 7 bankruptcy is the last ditch effort by a debtor to resolve his debt problems, but it is usually not as bad on credit as some people would believe. Of all types of bankruptcy, Chapter 7 is probably the best because it allows one to discharge debt. While not an ideal option, Chapter 7 can be the best alternative to living paycheck-to-paycheck.

Effect on Credit Score

A Chapter 7 bankruptcy could bring your credit score down as many as 240 points or as few as 130, according to CNN. High credit scores, those in the 700s, will suffer the most damage because they have more credit to lose. Low scores in the 600s and below will probably see damage in the low end of this range. The FICO score formula used by most lenders, however, has so many variables that you cannot pinpoint the precise amount of points a bankruptcy will cost you.

Considerations

Although filing bankruptcy is never good for your credit, you will probably become more creditworthy once you emerge from a Chapter 7 proceeding than you were before. Chapter 7 wipes out --- called a discharge --- unsecured debt. The fact you need to file bankruptcy probably means you already have several missed payments and possibly some collections accounts. Also, discharging debt could be better than constant missed payments and years of financial problems. A creditor may see you as a good risk if receive a "clean slate."

Time Frame

No item stays on a credit report forever. Bankruptcies, Chapter 7 or 13, stay on longer than almost any other item: 10 years after the filing date of your Chapter 7. Once this time is up the credit bureaus cannot legally report it, and you can dispute the item with the credit bureaus if you still see on your report. Chapter 7 will usually remain on your report for 10 years even if you voluntarily withdraw your case.

Tip

It is possible to regain credit after a Chapter 7 or any other bankruptcy within two to four years. The key is to use credit again unless you feel you truly cannot handle it. Secured credit cards are a popular choice for rebuilding credit because they only require a security deposit on the credit limit. You could also cosign on a loan with somebody who has good credit.