Filing for bankruptcy can significantly impact credit scores, but the type of bankruptcy filed—Chapter 7 or Chapter 13—may influence the extent and duration of the impact.
Individuals considering bankruptcy should understand how each option affects their financial future to help them decide which chapter will work best for them.
Chapter 7 bankruptcy and credit impact
The duration of a bankruptcy’s impact depends on its type. Chapter 7 bankruptcy, often called liquidation bankruptcy, typically results in a more immediate and severe drop in credit scores. This type of bankruptcy remains on credit reports for 10 years from the filing date.
During this time, obtaining new credit can be more challenging. Its impact lessens over time as the filing ages and financial habits improve. Individuals can start rebuilding their credit soon after filing.
Chapter 13 bankruptcy and credit impact
Chapter 13 bankruptcy involves a repayment plan, allowing individuals to pay off debts over three to five years. Because this form of bankruptcy demonstrates a commitment to repaying creditors, it may have a less severe initial impact on credit scores compared to Chapter 7.
Chapter 13 remains on credit reports for only seven years from the filing date, which is three years less than Chapter 7.
Building financial resilience
Choosing between Chapter 7 and Chapter 13 bankruptcy includes weighing the long-term effects on credit. By understanding how each option impacts credit scores and the duration of that impact, individuals can make informed decisions and begin the path toward financial stability.