What Looks Worse on My Credit Report, a Repossession or a Bankruptcy?

Generally, your payment history with lenders has the most influence on your credit report when determining credit scoring. Late payments do damage your credit score, but not paying debts at all lowers your score and significantly reduces your creditworthiness with would-be lenders. The negative influence of bankruptcy or repossession depends on other information on your credit report and your starting score.

Credit Scoring Facts

According to the Fair Isaac Corp., or FICO, bankruptcy represents the single biggest negative mark on your credit score, and individuals with decent beginning scores generally notice the largest drop in scoring. If your credit report already reflects multiple or recurring late payments or delinquencies, bankruptcies and repossessions won't ding your credit as badly as if you had a positive repayment history prior to filing. However, your credit report constantly changes, and the damage of a bankruptcy or repossession does diminish as new positive information is added.

Comparisons

Repossessions remain on your credit report for seven years while a bankruptcy can linger for up to 10 years. Repossession appears on your report as a default against a single creditor. Bankruptcy involves discharging all or most debts, indicating serious financial problems or money mismanagement to lenders. Adversely, some employers, insurance agencies and other companies use your credit report to help determine creditworthiness. While a single delinquency is frowned upon, a bankruptcy may hinder your prospects with a wider range of opportunities, not just future lending.

Bankruptcy and Repossession Types

According to the Experian credit-reporting agency, the credit scoring differences between voluntary and involuntary repossessions are minor. However, the former may indicate more financial responsibility to lenders if, say, you returned the vehicle rather than allowing the company to come take it. Both Chapter 7 and Chapter 13 bankruptcies --- commonly used personal bankruptcy options --- are scored the similarly under the FICO scoring model. Chapter 7 may involve liquidating some assets before discharging debts, while Chapter 13 requires a repayment plan for most debts prior to discharge.

Concerns

Although bankruptcy may absolve you of responsibility for most or all your debts, lenders still have rights regarding secured debts such as home or car loans. If you do not establish a new payment plan or continue to make payments, creditors may repossess the vehicle or property, depending on state laws and your particular bankruptcy case. Essentially, repossession can occur after the bankruptcy resolves even if the loan is discharged.