Chapter 7 bankruptcy offers the fastest path to the discharge of someone’s unsecured debts. A Chapter 7 filer will not be subject to a repayment plan requirement. A Chapter 7 bankruptcy filing can protect someone from a creditor lawsuit and other aggressive collection activities that could affect their financial stability and their overall well-being
A Chapter 7 filing will have a very strong negative impact on someone’s credit immediately after they file. The credit consequences will taper off over time after the courts grant a discharge. As a result, it is important to be aware of this reality but to not stress about it too profoundly as long as any filer who takes advantage of this process is committed to rebuilding their score over time.
Immediately after filing
When someone files for bankruptcy, their credit score will drop, often by 200 points or even more. Additionally, creditors almost always freeze or close revolving lines of credit until the resolution of the bankruptcy filing. In other words, an individual will no longer have credit cards available to cover their cost-of-living expenses.
After the discharge
Once the bankruptcy process is complete and the courts grant the discharge of someone’s qualifying unsecured debts, they will be in a position to start seeking new lines of credit. Secured credit cards are often the first option that someone has, and high interest rates and deposits are common. However, the sooner someone starts making payments, the sooner they start developing a positive credit history.
All of their prior blemishes, including accounts and collections and late payments, will disappear, with only the bankruptcy filing to take the place of those multiple other issues. As more time passes, the bankruptcy will have less effect on the decisions of potential creditors, and lenders will begin to offer larger lines of credit with better terms. Many people can qualify for vehicle loans and mortgages within a few years of their discharge.
After 10 years
A decade after someone’s bankruptcy discharge in a Chapter 7 filing, the bankruptcy will completely come off of their credit report. Although it only takes a year or two for dedicated filers to start rebuilding their scores. In many cases, people who successfully complete the bankruptcy process may have a higher score a few years after bankruptcy than they ever had before.
Understanding the effects that Chapter 7 bankruptcy has on credit will help people choose an informed path forward if they are struggling with their financial obligations.