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What to Know When Filing for Bankruptcy

Written by Equifax Experts on September 16, 2013 in Credit  |   15 comments

If your debts are piling up, you may be considering bankruptcy. Before you make the decision, it’s important to understand how long a bankruptcy can stay on your credit report and how it can potentially impact your credit score.

credit score, credit report, bankruptcyIf that stack of bills is quickly becoming too much to handle, you might find yourself considering bankruptcy. But before you decide whether this is the right option for you, it’s important to understand what bankruptcy can do to your credit score and how long you may see the bankruptcy on your credit report.

First, the basics: There are three different types of bankruptcies available to consumers: Chapter 7, Chapter 13, and Chapter 12.

Chapter 7

Perhaps the most widely known type of bankruptcy is Chapter 7. According to Debt.org, Chapter 7 bankruptcy filings make up about 70 percent of non-business bankruptcy cases.

Chapter 7 is often known as “straight bankruptcy,” and it involves the sale of all assets (that aren’t deemed exempt) by a court-appointed official. Alternatively, those assets can be turned over to your creditors as repayment. Exempt assets can include cars, work-related tools, and basic household furnishings.

The Chapter 7 bankruptcy laws state that you are required to wait eight years after emerging from a Chapter 7 bankruptcy before becoming eligible to file another Chapter 7 bankruptcy. Before filing Chapter 7, you must satisfy a “means test” to confirm that your income does not exceed a certain amount that varies by state.

Chapter 13

Debt.org states that Chapter 13 bankruptcy filings account for 30 percent of non-business bankruptcies. However, in 2005 Congress revamped bankruptcy laws to make Chapter 13 more appealing to consumers.

In a Chapter 13 bankruptcy—also called a “wage earner’s plan”—the court approves a repayment plan that lets you use future income to pay off all or part of your debts over a three to five year period instead of selling off your assets. Chapter 13 can even help stop foreclosure proceedings, provided you’re able to make all mortgage payments that come due during the life of the repayment plan.

Chapter 12

A lesser-known consumer bankruptcy filing is a Chapter 12, which is designated for “family farmers” or “family fishermen” (terms that are defined in the Bankruptcy Code) with regular annual income. It helps these folks create and carry out a plan to repay all or part of their debts in installments over three to five years.

Should I file for bankruptcy?

While a bankruptcy filing helps organize debts and shelters you from aggressive creditors, it isn’t a cure-all for debt troubles. Bankruptcy doesn’t typically relieve you of alimony and child support or loans obtained through fraud. It also doesn’t protect you from debts that are incurred after bankruptcy is filed or, in some cases, debts that began in the six months prior to bankruptcy. Some student loans and taxes aren’t covered either.

If you do choose to file, you are required to get credit counseling from a government-approved organization within six months before you file for any chapter of bankruptcy. You can find a state-by-state list of approved counselors at www.usdoj.gov/ust.

You may also want to consider how long a bankruptcy stays on your credit file. Different chapters of bankruptcy stay with you for different lengths of time.

The public record of a bankruptcy will generally continue to appear on your credit report for 10 years after the filing date. The individual debts included in the bankruptcy, such as credit accounts, may fall off your credit report seven years and 180 days from the start of the delinquency. This means you may see individual accounts removed from your report before you see the record of the bankruptcy disappear.

15 comments

  1. Bankruptcy In Australia says:

    Great insights about bankruptcy.

  2. DMW says:

    I recently had my Chapter 13 bankruptcy discharged after successfully completing my program and I am trying to re-establish my credit. Can a creditor that accepted payments under a Chapter 13 payment plan legally start reporting the debt as “charged off” after the bankruptcy has been discharged?

    • EFX Moderator, KB says:

      DMW, that’s a good question. A discharged chapter 13 bankruptcy generally remains on your credit file for seven years from the date filed. Here is more information on Chapter 13 discharges: http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/

    • Paphijohn says:

      Technically, any creditor may report an account as CO prior to the discharge. However, the negative reporting on a account after the discharge is a violation to the permanent injunction of the discharge. You need to contact the creditor via a certified letter sending them proof that they accepted payment prior to the discharge date and they need to correct their reporting.

  3. Terrance L. Matthews says:

    what about lien stripping of second Mortgages through BK. Can you stop payment the second mort5gage after BK?

    • GJH says:

      Yes, after you file, you can stop paying your second if you intend to lien strip the mortgage. This usually only works if the value of your home is less than what you owe on your first mortgage. If you’re underwater on the first, there’s no value in the home for the second to attach to. Your attorney can then file an adversary proceeding to strip the lien and convert the debt to unsecured debt. Upon completion of your plan and discharge, the second mortgage will drop off the house. However if you fail to complete your plan, chances are the mortgage will reattach. All depends on how the adversary proceedings turn out.

      As always though, consult with your attorney. This is just from my own personal experience.

    • Barb K says:

      I have the same question… I have been paying it for 3 years since the chapter 7 discharge… should I bee paying this… it was a secure home improvement loan with my house as collateral??? Any help would be greatly appreciated…

  4. GJH says:

    This post should also include the availability of CH 11 to individuals. CH 13 has debt limits and if you exceed those levels, you’re forced into an 11. Much more expensive option, but if your debt levels are that high, it’s worth the cost to proceed with the 11.

  5. Lovell Woods Gamble says:

    No, you must continue to pay the 2nd mortgage.

  6. W torres says:

    what happens if you filed for ch 13 then decided to cancel. Will the filing and continuing remain on your credit profile for 7 years also?

  7. rcn says:

    Ive never had reason for bankruptcy and only got involved with a chapt 13 bankruptcy started by my spouse, trying to understand and protect my credit. Ive continued the payments w/o fail and have tried to get a mortgage payoff myself and thru attorneys and cant get a response from ANYONE after being told its in bankuptcy and they didnt have look up the information for me.

  8. david says:

    So what if I competed chapter 13, a creditor is reporting it as chapter 7. I disputed this with Equifax and Equifax claimed that the company stunned proof that it was chapter 7. Under the law, are both Equifax and the other company culpable for this miss representation. It is clear that the company coups not have dipped proof of chapter 7 since my case was chapter 13.

  9. Mary says:

    Husband and I claimed ch 13 bankruptcy. It is now discharged over a year. We went to get a pre-approval for a home and to our dismay we were told that our home was included in the bankruptcy. How did my attorney sly that right under our noses ? We had every intention of paying for our home, never been late and did not want our home included in the bankruptcy. now the mortgage co is saying we need to get the debt reaffirmed. Is it possible to get the mortgage debt reaffirmed?


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