Filing for bankruptcy can have a significant effect on your credit score; however, it can also provide a necessary reset for those struggling with insurmountable debt. When you file for bankruptcy, it will generally remain on your credit report for seven to ten years, depending on the chapter of bankruptcy filed. Chapter 13 bankruptcy, which involves restructuring your debt by way of a monthly repayment plan, remains for seven years, while Chapter 7 bankruptcy, which eliminates most debts entirely by way of asset liquidation, stays on your report for ten years. While this may initially lower your credit score, it’s essential to understand that many individuals filing for bankruptcy already have low credit scores due to missed payments or high debt-to-income ratios, but simply filing for bankruptcy may actually improve your credit score in both the short and long term.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy, often referred to as a "wage earner's plan," allows individuals with a stable income to create a repayment plan for their debts. Under this chapter, creditors are repaid over a period of three to five years based on a structured payment plan approved by the court. The primary advantage of Chapter 13 is that it enables individuals to keep their assets, such as a home or car, while catching up on overdue payments. Often, you may only be required to repay a select few of your creditors during the Chapter 13 process. Additionally, this type of bankruptcy can stop foreclosure proceedings, wage garnishments, and bank levies, and provides an opportunity to bring delinquent mortgage payments up to date. However, it requires consistent income and a commitment to adhering to the court-approved repayment schedule.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy, also known as "liquidation bankruptcy," is designed for individuals who cannot feasibly repay their debts. This process involves the sale of non-exempt assets by a court-appointed trustee to pay back creditors. Most unsecured debts, such as credit card debts, loan balances, and medical bills, are discharged after the liquidation process, granting the debtor a fresh financial start. Unlike Chapter 13, Chapter 7 does not require a repayment plan, but it comes with the risk of losing certain assets. To qualify, individuals must pass a "means test" to determine if their income falls below the threshold that would allow for filing under this chapter. While it offers a swift resolution to overwhelming debt, it has a more severe impact on credit scores and may require rebuilding financial stability over time.
Bankruptcy can provide long-term financial relief and stability for individuals overwhelmed by debt. By discharging eligible debts, it allows debtors to reset their financial situation and focus on rebuilding their future. Over time, the elimination of debt can lower financial stress and create opportunities for better financial planning, saving, and investing. Additionally, bankruptcy can halt collection efforts, offering immediate relief that sets the stage for long-term recovery. With diligent budgeting and the responsible use of credit after the process, individuals can rebuild their creditworthiness and establish a more secure financial foundation over the years.
The long-term impact of bankruptcy, however, can be more positive than continuing to struggle with unmanageable debt. By clearing your financial obligations, bankruptcy allows you to rebuild your credit over time with responsible financial habits. Many people start receiving credit offers just a few months after their case is discharged, though these may initially come with higher interest rates.
It’s crucial to explore all your legal options and choose the type of bankruptcy that best suits your financial situation. Sisk Law Firm is here to guide you through this challenging process and help you understand the choices available. Contact us today for a free consultation—we’re dedicated to helping you take the first step toward financial recovery and regaining control of your future.