There are two types of consumer bankruptcy, according to the Federal Trade Commission. Chapter 13 bankruptcy allows the filer to keep most possessions, but it also requires repayment of many bills. Chapter 7 bankruptcy is more drastic, and both types remain on credit bureau files for a long time.
Definition
The FTC explains that Chapter 7 bankruptcy is a court action that liquidates most of a person's assets and discharges almost all of their debts. Filing for Chapter 7 bankruptcy stops utility shut-offs, wage garnishments, repossessions, foreclosures and collection agency harassment. The eventual court discharge does not eliminate certain bills like child support, alimony, taxes and certain student loans.
Time Frame
Chapter 7 bankruptcy remains on a person's credit records for 10 years, according to the FTC. It shows up every time a lender or other company or individual orders a copy of that person's TransUnion, Equifax or Experian credit reports. Consumers are allowed to file Chapter 7 bankruptcy every eight years, and each case remains on their credit reports for a full decade.
Effects
Bankruptcy is a serious blemish on a credit file, according to the Bankrate financial website. A Chapter 7 filing shows that the consumer totally defaulted on the debts. Bankrate explains that this does not completely stop that person's ability to get credit. It makes the process more difficult and usually means paying an inflated interest rate to offset the lender's increased risk.
Solution
Chapter 7 bankruptcy may stay in a credit file for ten years, but Liz Pulliam Weston of MSN Money explains that its effects diminish over time for consumers who rebuild their post-bankruptcy credit. Lenders look at the entire credit report but put more weight on recent transactions. Smart consumers focus on careful credit use, including limited spending and making all payments on time. Pulliam Weston states that those who cannot get traditional credit cards to rebuild a good history can open secured accounts. Secured credit cards require a deposit for collateral and extend a credit limit equal to the deposit.
Alternatives
The FTC advises that there are alternatives to Chapter 7 bankruptcy. It advises creating a strict budget or contacting creditors and bills collectors to set up workable payment arrangements. Consumers who cannot create plans on their own can work with non-profit credit counseling agencies. These agencies assess the individual's situation and either create a budget or set up a formal debt management plan. The plan often involves negotiating with creditors to reduce balances or interest. The person's credit records eventually recover if plan payments are made on time, and previous negative records drop off the file in seven years.
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