Filing for bankruptcy may feel like a major financial setback, but it also offers a fresh start. The impact of bankruptcy on your credit is one of the most common concerns. Whether you file for Chapter 7 or Chapter 13 bankruptcy, your credit score will drop; however, the extent of the damage and the timeline for recovery vary.
The impact of Chapter 7 bankruptcy on credit
Chapter 7 bankruptcy, also known as liquidation bankruptcy, involves discharging most of your unsecured debts. This includes credit card bills, medical bills, and personal loans. However, the process significantly impacts your credit score. A Chapter 7 filing stays on your credit report for up to 10 years. During this time, you may find it difficult to secure new credit or loans. The good news is that once the discharge happens, your debts disappear, which can help improve your financial standing over time.
In Maryland, individuals who file Chapter 7 may also exempt certain property from liquidation, helping them preserve assets while discharging qualifying debts. Even though your score will drop initially, removing high balances and overdue accounts can gradually help raise your score once you’re on a better financial footing.
The impact of Chapter 13 bankruptcy on credit
Chapter 13 bankruptcy is a reorganization bankruptcy, which allows you to create a repayment plan for your debts over three to five years. While this option can cause less damage to your credit score than Chapter 7, it still results in a drop. A Chapter 13 filing stays on your credit report for seven years. Because you continue paying back your debts in this type of bankruptcy, lenders may view you as less risky compared to someone who files under Chapter 7.
In Maryland, Chapter 13 bankruptcy also offers protection from foreclosure or repossession during the repayment period. Once you complete the repayment plan, any remaining unsecured debt is discharged, allowing you to rebuild your credit more effectively than if you had chosen Chapter 7.
Rebuilding credit after bankruptcy
Regardless of the type of bankruptcy filed, you can take steps to rebuild your credit. Start by obtaining a secured credit card, keeping credit utilization low, and paying your bills on time. Over time, you can show creditors that you’re financially responsible, which will help restore your credit score.
Bankruptcy does not mark the end of your credit opportunities. With time and good financial habits, you can rebuild your credit after a bankruptcy discharge.