There are plenty of misconceptions surrounding financial issues and bankruptcy is one of the most difficult for consumers to grasp. While some consumers may have heard they are able to declare bankruptcy due to serious money problems, it's not as simple as having bad credit wiped away from your history and starting with a clean slate. There are huge financial implications associated with bankruptcy and it should not be taken lightly because this action could affect your ability to be approved for credit down the line.
Here are some frequently asked questions about bankruptcy and their answers:
What is Bankruptcy and How Does It Work?
When a consumer or a business does not have the means to pay their debts, filing for bankruptcy is an option. In this legal process, you file for bankruptcy and have your assets evaluated to determine the ability to repay. Afterward, you might have your outstanding debt removed from your accounts. There are various types of bankruptcy filings with the most common being Chapter 7 and Chapter 13 bankruptcies. When someone undergoes Chapter 13 bankruptcy, you are expected to pay back some of your debt. In filing for Chapter 7 bankruptcy, you do not repay any debts described in the filing.
What is the Impact of Bankruptcy on My Credit?
Although you may have to pay some or none of your previous debts, they don't instantly disappear from your credit report. Once the debts are discharged, the account may indicate a bankruptcy status, reading as a zero balance or saying "included in bankruptcy" or "discharged in bankruptcy." However, even though it says a "zero balance," any form of bankruptcy is still recorded in your credit history and can affect your credit score. Adverse public records, including bankruptcies, can significantly impact your credit, dropping your score by 100 points or more, according to credit score provider FICO.
How Long Does Bankruptcy Stay on Credit Reports?
Bankruptcy listings could stay on your credit reports for up to ten years. To ensure your report does not have errors that may show up, especially when it comes to making sure nonbankruptcy-related accounts are not in bankruptcy status, you should request your credit history from a credit reporting bureau to verify.