Bankruptcy is legal protection from your creditors. It’s also, unfortunately, the worst thing you can do to a credit report despite offering almost immediate relief from a burdensome debt load. A bankruptcy on your credit reports, especially a new filing, can cause your credit scores to be as low as they’ve ever been.
The Administrative Office of U.S. Courts reported that 1,072,807 non-business bankruptcies were filed in the year 2013 alone. The vast majority of those consumers filed for either a Chapter 7 bankruptcy (liquidation of debts) or a Chapter 13 bankruptcy (adjustment of debts).
Both types of bankruptcy have the same negative impact on a consumer’s credit scores but the credit reporting statutes of limitations for the two types of bankruptcies are a little different. Here is a look at how a bankruptcy ends up on a consumer’s credit report and how long the bankruptcy is allowed to remain.
The Public Record
Contrary to a popular credit myth, bankruptcies are not reported to the credit reporting agencies (Equifax, Trans Union, and Experian) by any courthouse or by any court clerk. What actually happens is that the credit reporting agencies proactively collect bankruptcy filings via a system called PACER (Public Access to Court Electronic Records). Bankruptcies are included in the “Public Records” section of a consumer’s credit report.
The Chapter 7
The chapter or type of bankruptcy ultimately determines how long it is allowed to remain on a consumer’s credit report. All bankruptcies are not treated equally in the world of credit reporting. According to the Fair Credit Reporting Act the maximum amount of time that a Chapter 7 bankruptcy is allowed to remain on a consumer’s credit report is 10 years from the date the bankruptcy was filed.
Keep in mind that the FCRA only dictates how long a bankruptcy can remain on file, not the minimum amount of time it has to remain. Maintaining a bankruptcy on a credit file, or any other derogatory item, is the choice of the credit-reporting agency. They could choose to remove all negative items after two or three years, but they all default to the maximum time allowable by law.
The Chapter 13
The credit reporting statute of limitations for Chapter 13 bankruptcies is slightly more complicated than its Chapter 7 counterpart. According to the FCRA a Chapter 13 bankruptcy must be removed from a consumer’s credit report 7 years after the date the bankruptcy was discharged, but not to exceed 10 years. The discharge date of a chapter 13 is not the same as the filing date.
Chapter 13 bankruptcies allow consumers to stop collection procedures while they restructure their debts and enter into a plan to repay those debts, or at least a portion of them, over a period of 3-5 years. Chapter 13 bankruptcies are not discharged until the 3-5 year repayment plan is completed. Since Chapter 13s are not removed from credit reports until 7 years from the date of discharge you can see how it could easily hit the 10 year reporting time cap. In fact, the majority of chapter 13 bankruptcies remain on file for a full 10 years.