Bankruptcy's Effects: How Long Does It Last on Your Credit?

 

One of the biggest reasons why people are hesitant to file for bankruptcy, even when they are drowning in debt, according to The Phenix Group, is that bankruptcy has a negative influence on one's credit score. The filer might expect a total score loss of 160 to 220 points depending on the type of bankruptcy filed.

Even if your credit was strong to begin with, this is a big decline that will likely deter any creditors from offering loans or credit cards.

Still, many people file because they have no other option and know that allowing bills to grow and build up is ultimately worse for their credit score than waving the white flag and admitting they are insolvent.

WHY IS BANKRUPTCY PREFERABLE TO WAITING IT OUT?

Hopefully, you are not on the verge of bankruptcy, but you may be wondering what the advantages of filing bankruptcy are over simply ignoring your obligations. First and foremost, it is critical to comprehend exactly what bankruptcy entails. Depending on the type of bankruptcy you file, you may be able to lawfully discharge any outstanding debts.

Creditors will no longer be able to take you to court in order to collect on unpaid debts. While this may be appealing, keep in mind that bankruptcy might destroy your credit score.

Is bankruptcy a better option than simply waiting it out? That is debatable. Most states have a debt statute of limitations, which indicates that a creditor only has a limited time to prosecute someone for not paying a debt.

The statue of limitations in some places expires after 4 years, so depending on where you reside, it may be wiser to roll the dice and hope that you can stay delinquent long enough for your creditor to sue you.

Your age, marital status, and income will all play a role. If you are a senior adult living on a fixed income, a creditor will be less likely to act before the statue of limitations expires and actually suit you. Let's imagine you're in your 30s, have a career, and haven't married or started a family yet. Then you're a tempting target for lawsuit because you not only have the time to pay off your debt as a judge has ordered, but you also have a job and a steady stream of income.

In this instance, filing for bankruptcy is generally better than taking a significant risk that a creditor will not sue you while they still have the chance.

AN EXAMINATION OF CHAPTER 7 OF THE BANKRUPTCY LAW

To be eligible for chapter 7 bankruptcy, you must be able to demonstrate beyond a reasonable doubt that you do not have enough income to pay off your debts. Although Chapter 7 relieves you of your legal need to repay your debts, it can be unpleasant, and not just because it reduces your credit score. Which of your assets are nonexempt will be determined by the court, and any nonexempt assets or properties will be appropriated and auctioned to assist pay off your debts.

Any property or asset that the court finds exempt is yours to keep.

So it's possible that a court will declare a debtor's home nonexempt property if, for example, the home has a lot of equity. The debtor's home will be confiscated and sold in this situation. Any debt that cannot be paid off through nonexempt asset liquidation will be transferred from the chapter 7 filer to a court-appointed trustee.

AN EXAMINATION OF CHAPTER 13 OF THE BANKRUPTCY CODE

The debtor can work out a payment plan with their creditors in Chapter 13 bankruptcy. Unlike Chapter 7, Chapter 13 does not absolve the debtor of responsibility for debt repayment. Instead, depending on the scenario, it allows the debtor to work out a payment plan over 3 or 5 years. The payments are subsequently distributed to creditors by a trustee, and the debtor has no further interaction with the businesses to which they owe money.

In addition, Chapter 13 stops foreclosure proceedings, allowing the debtor to keep their house and nonexempt assets.

CHAPTER 7 AND CHAPTER 13 REMAIN ON YOUR CREDIT REPORT FOR HOW LONG?

Another important contrast between chapters 7 and 13 is the length of time they have an impact on your credit score. A bankruptcy cannot linger on a debtor's record for longer than ten years, according to the law. However, in the case of a chapter 13, the motion will only stay on your credit report for seven years.

Because the situation is typically serious and the client is effectively claiming they have no possibility of repaying the bills, Chapter 7s normally stay on your record for ten years.

You don't have to do anything to remove these marks from your record because they are legally mandated to be removed after seven or ten years. There are also ways to begin rebuilding your credit during the 7 to 10-year period that the filing remains on your record. While bankruptcy is a serious scenario that might ruin your credit, it is not the end of the world. With time and effort, you may improve your credit and be more effective in your credit repair efforts.

Related Articles:

https://thephenixgroup.com/what-is-a-609-dispute-letter

https://thephenixgroup.com/collections-and-your-credit-score-we-answer-the-top-questions

https://thephenixgroup.com/everything-you-need-to-know-about-national-credit-systems



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