What is the first thing you think of when you hear the work bankruptcy? There are many answers that may come to mind with getting out of debt being the only answer that is positive. Those are the facts with bankruptcy - it is a final and last resort for dealing with debt that has many negative consequences in return for getting a “fresh” start. One of the consequences that most people fear is the impact bankruptcy has on your credit. By far the most damaging form of debt elimination, filing for bankruptcy is viewed as the blackest mark on your credit history. Unfortunately if you are unable to manage your current debt level and have no reasonable expectation to either negotiate a repayment plan or acquire funds for a settlement it may be your only recourse. Here we cover two forms of bankruptcy and how they impact your credit.

Chapter 7 Bankruptcy
This type of bankruptcy absolves you of eligible debt and has the worst impact on your credit. Excluding taxes, alimony and child support you will be free of debt but may experience difficulty qualifying for credit in the future.

Chapter 13 Bankruptcy
While still having a negative impact on your credit, Chapter 13 is viewed as slightly better in that you show a willingness to repay debt. Instead of absolving your debt, you agree to establish a repayment plan to creditors in a designated time frame. This allows you to “catch up” while keeping your current accounts in good standing. In addition to repaying your debt you may also receive approved credit counseling as part of the legal process to stop foreclosure or repossession of assets. These steps show you are making an attempt to correct your financial situation and will be considered in future credit decisions.

When Will My Credit Recover?
A bankruptcy filing can stay on your credit report for up to ten years. In most cases a Chapter 13 bankruptcy falls off the credit report in seven years. That does not mean your credit will be “bad” for the entire time however lenders or other people viewing your credit report will be able to see you filed for bankruptcy in the past which unfortunately has a social stigma that can remain long after the bankruptcy no longer appears on your credit report. Your credit will take a hit by filing for bankruptcy but that does not mean you will not ever be able to obtain credit again. In fact, some lenders may consider you for a loan after filing for bankruptcy because they know you are now without debt (therefore increasing the chance you can pay the new loan) and you will not be able to file bankruptcy again within eight years.

Overall the impact of bankruptcy on your credit is always negative. With that in mind living or attempting to live with overwhelming debt is not going to help your credit. If you qualify for bankruptcy and truly have no other options, poor credit might be the price to pay for debt relief.