How to Get Bankruptcy Off Your Credit Report

Sometimes it can be difficult to scale the mountain of debt. To file Bankruptcy is the admittance and acceptance that you can’t climb that mountain. ⛰️

Bankruptcy, also known as financial rock bottom, is an option for many individuals with unmanageable debt. In fact, as of June 2020, 659,881 consumers have filed bankruptcy in the United States in one year’s time.

In that sense, if you’ve filed bankruptcy, or you’re considering it—you’re not alone.

While bankruptcy can have significantly negative repercussions, it can also be a viable solution for many. In this article, we’ll discuss how the process of bankruptcy works—and how you can potentially get that burdensome term removed from your credit report.

What you’ll learn

• What is Bankruptcy?
• Chapter 7 Bankruptcy Explained
• Chapter 13 Bankruptcy
• Accounts Discharged when Filing Bankruptcy
• How Bankruptcy Impacts Credit
• How Long Does Bankruptcy Stay On Your Credit Report?
• Removing Bankruptcy From Your Credit Report
• Rebuilding Credit After Bankruptcy

What is Bankruptcy? 🔎

The word bankruptcy comes from the Italian words “banca rotta” which literally means “broken bench” or “broken bank.”  Appropriately named considering bankers classically did business from benches in the old days.  

Bankruptcy is an extensive legal process that exists to help both consumers and companies get a financial reboot. The process consists of discarding or “discharging” unpaid debt. In almost every case, a court order causes the debtor to seek debt relief through bankruptcy.

To file bankruptcy, you must be in good standing with the courts. You also must have had credit counseling in the past six months. The type of bankruptcy may also have its own specific guidelines and qualifying factors.

There are 6 types of bankruptcy, also known as chapters. However, only two chapters (7 and 13) are common for individuals.

Chapter 7 Bankruptcy Explained 📖

This chapter is oftentimes referred to as “straight bankruptcy” or “simple bankruptcy.” Chapter 7 is the most common type of bankruptcy for consumers. With chapter 7 debtors can potentially have most of their debts discharged over a period of 3-6 months.

With chapter 7, the debtor is required to sell “or liquidate” a nonexempt property to pay some of the owed debts. Nonexempt property is a property that isn’t protected by bankruptcy, usually classified as luxury items. These properties can be:

• A nonresidential investment home or second home
• Newer or luxury vehicles that have equity
• Expensive jewelry or clothing
• Technology that is nonessential for your profession
• Artwork or other collections
• Investments that aren’t held in retirement accounts 

In most states, you can exempt or protect your primary residence and other essentials for survival. This includes furnishings, clothing, retirement accounts, and a primary vehicle. 

The goal of bankruptcy is to get a fresh financial start, not to lose anything and everything you possess. And fortunately, most court systems acknowledge this.  🙏

Nonexempt property is then sold to a bankruptcy trustee. A bankruptcy trustee is a court-appointed individual who is responsible for overseeing the case. The proceeds of the property are then distributed to the debtor’s creditors to pay the debts. This is done in exchange for the discharge of most debts.

The vast majority of US individuals filing for chapter 7 bankruptcy hire an attorney to assist in filing their petition. 

Chapter 7 is an option for individuals who may lack consistent income or do not wish to use the Chapter 13 payment plan system.

Chapter 13 Bankruptcy

The second most commonly used bankruptcy by consumers is Chapter 13. With Chapter 13, debtors keep ownership of all their assets but must have a regular income. The debtor then dedicates a portion of future income to repaying creditors. This is typically over a 3 to 5-year span.

The amount the debtor must dedicate depends on a variety of factors. Income and expenses and property value are some of the major factors. The debtor makes payments to the bankruptcy trustee who in turn disperses the funds to the creditors. 

The original terms and agreement of the plan set the foundation for the payments. The court will formally grant the debtor discharge of the debts upon repayment.

Chapter 13 is best for individuals with regular income. It is a way to get creditors off your back, manage payments, and pause collection or other legal proceedings.

Accounts Discharged When Filing Bankruptcy

Bankruptcy can be a way to seek financial relief when you’ve gotten yourself into a mess. But sadly, not all types of debts are discharged upon filing bankruptcy. 

A lot of unsecured debt is dischargeable in Chapter 7 and 13. This includes credit cards, payday loans, medical bills, utility bills, back rent, personal loans, and most other types of installment loans.

Additionally, pretty much any secured debt can face discharge. However, the lien on the property will not go away. This means that if you decide to discharge a mortgage or car loan, you’ll have to give up your house or car.

The real bummer? There are some types of unsecured debt that aren’t dischargeable under bankruptcy. If you wish to seek relief from federal student loans, child support, most back tax bills, or criminal fines, you are out of luck. Filing bankruptcy cannot kill these types of debts.

How Does Filing Bankruptcy Affect Your Credit? 📉

Now let’s get into the juicy details of bankruptcy. What the heck happens to your credit when you decide to file bankruptcy?

There are many negative factors that can appear on your credit report. For one, dealing with collections agencies, charge-offs, and late payments are some of the worst. But, bankruptcy tops them all as filing for bankruptcy can do the most damage to your credit report.

When you file bankruptcy your credit score will take a sharp dive. The amount of this dive varies based on your original score. But, it’s also likely that once you get to the bankruptcy point that you’ve already seen a major score decrease.

According to FICO, filing for bankruptcy can potentially send a good credit rating (700+) 200 points in the downward direction. This now puts you in the poor range. But, if your score is in the bit lower 600s, you’ll lose between 130 and 150 points- which is still a sharp dive.

The rule of thumb is the lower your score is, the less impact you will see. This is simply because you have fewer points to lose with a Fair, Poor, or Very Poor score. Either way, you’ll end up in the poor rating section.

Chapter 7 has a more negative credit impact simply because it’s designed for you to abandon your debt and not make any repayments. Therefore it’s a higher credit risk. Your score will also likely take a bigger fall than with chapter 13.

With chapter 13 you are at least repaying some of your debt, so the consequences, while still drastic, aren’t as bad as it is with chapter 7.

The number of debts you discharge will also impact your credit score. When you default on several accounts with large balances it will affect you a lot more than fewer accounts with smaller balances.

How Long Does Bankruptcy Stay on Your Credit Report? ⏳

Seven is the magical number for most credit factors. Missed payments, collections, charge-offs, and foreclosures are some items that follow the seven-year rule. Chapter 13 Bankruptcy is another one to add to that list. 

In general, Chapter 13 Bankruptcy will be a black mark on your credit report for seven years. The seven-year clock starts ticking from the bankruptcy filing date.

However, this is assuming the debts weren’t delinquent prior to bankruptcy. In this case, bankruptcy falls off your credit report seven years from the original delinquency date. This is because the delinquent account will fall off your report before the bankruptcy record.

Chapter 7 bankruptcy does not follow the seven-year rule, however. Confusing, right? 🤔

Chapter 7 bankruptcy remains on your credit report for 10 years from the filing date. But, the same rule applies to delinquent accounts as with Chapter 13. Delinquent accounts will be deleted seven years from the original delinquency date. This lessens the impact of the 10-year wait. This means the bankruptcy record is the only thing to remain for an additional three years.

As with most credit factors, the impact of bankruptcy lessens with time. If you filed for bankruptcy 6 months ago, it’s going to hurt your credit report more than if you filed for bankruptcy 6 years ago. 

Time heals all wounds, and this is definitely the case with your credit.

How to Remove a Bankruptcy From Your Credit Report

The sad truth is that it is highly unlikely that an accurate bankruptcy record can come off your credit report. At least before the 7 or 10-year expiration. Darn it. 😟

But, in the case the bankruptcy remark is incorrect or misentered, you can dispute it with the credit bureaus. You can file to correct the mistake and even request to remove the bankruptcy entry at this point. This is honestly the only shot you have at having a legitimate entry removed.

Remember that you always have the right to challenge or dispute anything that reflects on your credit report. The Fair Credit Reporting Act requires all three credit agencies to resolve and investigate your claim within 30 days.

To begin, request a copy of your credit report from all three bureaus. Look over the reports for any errors.

If you notice an inaccuracy, no matter how small, draft a credit dispute letter. The absolute best case is the credit bureaus can’t verify the bankruptcy and send for deletion. This is a lot more likely with an older bankruptcy than a newer one. Remember, time is a huge factor with credit disputes.

If the bureaus verify the bankruptcy, you can take it even further and send a procedural request letter. This letter essentially just askes for proof of who verified the bankruptcy. And more than likely they will state that the debt was verified with the courts.

In some cases, courts don’t actually verify consumer information for the credit bureaus. So to take it even further you can contact the courts specified by the credit reporting agencies. Send them a letter requesting information on how they verified the bankruptcy. It’s likely they’ll deny verification and state they didn’t give any information.

If you can obtain this statement in writing, you can then send it to the credit bureaus with the request to remove the bankruptcy. It’s essentially a call-out on a major error.

This may or may not work, but it’s worth a shot if you have the time and energy to dedicate.

You can also seek professional help by hiring a credit repair company. They can do a similar process for you, but save you the time and energy. Remember, there is no guarantee of success.

Disputable Errors ❗️

Because of how long the bankruptcy remark remains on your credit report, it’s not uncommon for some errors to pop up. When you notice an error, it opens the gate for dispute. This only slightly increases your chances of getting the mark erased. Common errors include:

• Discharged debts that still reflect an unpaid balance
• Accounts still appearing after 7 years of the original delinquency date
• The bankruptcy remark is still showing after 7/10 years
• Inaccurately reported information such as names, addresses, dates, and creditors

You can also dispute a fraudulent bankruptcy remark, meaning one that doesn’t even belong to you. While it’s uncommon, clerical errors can happen and you can get stuck with a problem that isn’t even yours.

How to Rebuild Credit After Bankruptcy ✅

Since there isn’t a foolproof way to remove an accurate bankruptcy remark, what you want to focus on is rebuilding. You filed bankruptcy to get a fresh financial start. So do just that, start anew!

To be honest, rebuilding your credit score after having the massive impact of bankruptcy can be tough. But nothing is impossible.

First, remember to avoid the same mistakes that first led you down the Bankruptcy road. Work on other sides of your financial well being, including building a budget and savings account.

The best way to build credit is to establish a stable payment history. Be careful not to put too much new debt on yourself. 

Start small with either a secured loan or credit card. A secured loan allows you to offer up a chunk of money as collateral, sometimes in the form of a CD or Bond. With a secured credit card, you pay a deposit upfront equal to your credit limit.

With the bankruptcy reflecting on your credit report, it’s likely a secured loan or credit card will be your only immediate option. As time progresses, and the impact of your bankruptcy lessons, you’ll have more options. You’ll eventually be able to apply for a car loan or even a mortgage.

Just take it slow.

Seek professional credit counseling if you desire. Over time, you will get back on track and the bankruptcy will soon be a distant memory.

Oh, and if we haven’t drilled it into your head by now: time is everything.

About the author

Summer Nevins

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Summer is a banking professional and business school graduate turned expert finance writer. Raised in a small low-income town in the southern United States, Summer, like a lot of millennials, learned the ropes of personal finance the hard way. Both her work and life experiences led to discover her true passion for educating others about the complicated field of finance. Summer currently resides in the Greater Nashville Tennessee area with her husband. When she’s not writing, Summer enjoys exploring the beautiful world and hiking all of the challenging trails along the way.