Bankruptcy is a great tool to get a fresh start unburdened by the debt you had before you filed for bankruptcy. Because of the automatic stay, bankruptcy stops collections, including wage garnishments, bank account garnishments, foreclosure, auto repossessions, collection calls and letters, and more. The bankruptcy discharge is a court order that wipes away certain kinds of debt that the debtor had before filing for bankruptcy, such as credit card debt, personal loans, and sometimes taxes. Bankruptcy can also restructure secured debt, such as a home mortgage or a car loan.
However, like strong medicine, bankruptcy has some side effects. One of those side effects is that a bankruptcy, whether it be Chapter 7 or Chapter 13, can stay on your credit report record for up to 10 years.
Why Does a Good Credit Score Matter?
To first answer the question of how long does bankruptcy stay on your record, it is important to understand the importance of having a good credit score. Financial institutions, such as banks, mortgage lenders, auto lenders and business lenders typically consider the credit score of the applicant when deciding to make a loan. A credit score looks at the amount of debt, the payment history of the debt and the type of debt, and tallies a score which lenders look at when deciding whether to loan, how much to loan, and how much to charge on a loan with interest.
Interest is a percentage that the lender charges on the loan to make money on the loan, and the best interest rate available on a loan depends on the kind of loan. The Prime Rate of interest is currently 3.25%. However, mortgage rates during the COVID-19 pandemic have fallen dramatically, and currently, for a 30-year fixed mortgage, the interest rate is 2.97%. Even a slight increase in the interest rate can affect your monthly payment on a loan. The lower the person’s credit score, the more likely they are to pay high interest rates, which means that their monthly payments are higher.
How Do I Find My Credit Score?
You can find your credit score by visiting annualcreditreport.com and requesting free credit reports from all 3 credit bureaus or credit reporting agencies: Experian, Equifax and Transunion, or by using an app like Credit Karma. Knowledge is the key to improving your credit score, so checking your credit score on a regular basis and taking steps to improve it are vitally important to having a good credit score.
The Fair Credit Reporting Act
The Fair Credit Reporting Act regulates what credit bureaus can and cannot do when it comes to credit reports, and can help answer the question of how long does bankruptcy stay on your record.
15 U.S.C. § 1681c states that …”no consumer reporting agency may make any consumer report containing any of the following items of information…” “Cases under title 11 or under the Bankruptcy Act that, from the date of entry of the order for relief or the date of adjudication, as the case may be, antedate the report by more than 10 years.”
This means that a bankruptcy cannot appear on a credit report from more than 10 years from the date of the order for relief of bankruptcy, which is usually the bankruptcy filing date. The credit bureaus are required to correct information that is inaccurate, so keeping an eye on your credit report after you file for bankruptcy can help ensure that the information is reported correctly.
The Difference Between Chapter 7 and Chapter 13
How long does a bankruptcy stay on your record depends which kind of bankruptcy you file. Chapter 7 bankruptcy is the liquidation chapter of bankruptcy, and no payments are made to creditors. It is generally a quick process and debts like credit cards and personal loans are discharged in Chapter 7 after about 6 months from filing bankruptcy. Chapter 13 bankruptcy is a payment plan in which all or part of the debt is paid back over the course of 3-5 years, and the discharge is entered once the payment plan is complete.
Chapter 7 generally appears on your credit report for 10 years after filing. This is because in Chapter 7, no payments are made to creditors. However, credit bureaus typically only report Chapter 13 on your credit report for 7 years after filing bankruptcy. This means that if you file a 5-year Chapter 13 payment plan, you only have to wait 2 years after the bankruptcy for it to drop off of your credit report.
At Steiner Law Group we are often asked “how long does bankruptcy stay on your record?” If you are asking yourself this question, please call Steiner Law Group at (410) 670-7060 to learn more about how a bankruptcy can give you a fresh start.