To understand just how bankruptcy can help with your credit, first you need to understand how long certain items stay on your credit report. For entries such as late payments, charge-offs, collections, tax liens, judgments, and foreclosures the magic number is seven. These items stay on your report a full seven years. Another troublesome thing is that “hard inquiries” remain visible for two years and can cause your score to dip for as much as six months. If you have enough of these entries, your credit score can be punched down from good or fair credit into bad credit. If you are living on the financial edge, it’s going to be reflected in your report, even if you are making payments.
Some people look to consolidate their debts with a loan, giving themselves a single payment instead of multiple payments and interest rates to cover every month. It takes a large amount of discipline to stick with what is generally a slightly lower payment and avoiding the temptation to take all that open credit and use it. This loan can give you breathing room, provided you choose a reputable loan company, one that doesn’t charge origination fees, and offer a monthly fixed payment that you can afford. A consolidation loan will also appear on your credit report. Make no mistake, consolidation is about taking on debt to pay debt.
Bankruptcies remain on your credit for 7 to 10 years depending on whether you file for a Chapter 11 or a Chapter 7. While you might think that this is something of a disaster, it is much less of a disaster than might first appear. One of the advantages to bankruptcy for people in large amounts of debt, is called the “automatic stay.” The automatic stay goes into effect when a debtor files for bankruptcy, and creditors who continue to pursue for payment may be subject to penalties from the court, and may also be sued by the debtor. For those in a Chapter 7 filing, most debts are simply discharged since there is not enough in the way of assets to pay them. For those who are filing Chapter 13, debts are paid over a period of about five years and discharged when the bankruptcy filing is complete.
After a bankruptcy is concluded, yes your credit is generally not in very good shape. However, prohibited from filing under Chapter 7 if you have been discharged from Chapter 7 within the previous eight years, or from a Chapter 13 within the previous six years. Creditors know that, and may think that you are a better risk for credit than someone who has never had credit before. You will need to rebuild your credit, but as your bankruptcy moves further into the past and is outweighed by good credit, you will find that it’s easy to regain your financial footing as time goes by. There is no magic wand that will give you good credit, but bankruptcy can help you before your credit deteriorates any further.