A Chapter 7 bankruptcy allows debtors to eliminate most or all of their debts in a fairly rapid fashion. Most Chapter 7 proceedings only last three to four months, after which a debtor can be free from repayment obligations. However, the negative effects of bankruptcy can linger on a credit report for many years after a bankruptcy discharge.
A credit report is a history of your payments to creditors. Your report shows the types of accounts you have, the balances that you owe, and whether you make your payments on time. The data in the report provide lenders with the ability to gauge the risk they would absorb in offering you new or additional credit. The more negative accounts that show on your report, the less likely you will be able to obtain future credit, or at least credit at reasonable interest rates. A Chapter 7 bankruptcy is one of the most negative credit items that could show in your report. The three major credit-reporting agencies, Experian, TransUnion and Equifax, each report a Chapter 7 bankruptcy for 10 years.
Dismissed vs. Discharged Bankruptcies
Your objective if you file a Chapter 7 bankruptcy petition is to obtain a discharge of your outstanding debts. A discharge is a court order that prevents your creditors from pursuing you for the repayment of your listed debts at any time in the future. A bankruptcy dismissal, on the other hand, means that the case has been tossed out of court and offers you no protection from your creditors. Unfortunately, from a credit standpoint, a dismissed Chapter 7 bankruptcy still appears on your credit report for a full 10 years, just like a discharged bankruptcy.
When you receive your Chapter 7 discharge, you are no longer liable for your outstanding debt. To reflect this, your credit report should show a zero balance for all of your former creditors that were a part of the bankruptcy proceeding. As the size of your account balances is a large part of your credit score, it is important that the credit-reporting agencies accurately depict your debt as discharged in bankruptcy.
Chapter 7 vs. Chapter 13 Bankruptcy
If you file a Chapter 7 bankruptcy, you must surrender to the court assets above state-defined valuation levels known as exemptions. In return, you receive a discharge of your debts without making further payments to creditors. A Chapter 13 bankruptcy differs in that you maintain control of your assets but must make payments to your creditors for three to five years. As a result, the credit-reporting agencies will report a Chapter 13 bankruptcy for only seven years, as opposed to the 10 years of a Chapter 7 bankruptcy.