Credit Score

5 Bankruptcy Myths Debunked

Advertiser Disclosure Comments 26 Comments

5 Bankruptcy Myths DebunkedBankruptcy is undeniably one of the worst things — if not the worst thing — you can do to your credit, typically causing a credit score loss of more than 200 points.

However, you can minimize the impact and hasten the recovery of your credit through better awareness of how credit scores treat bankruptcy. To do this we’ll need to set the record straight on some of the most commonly held misconceptions about how bankruptcy impacts credit scores.

Myth #1: Having no negative information on your credit report prior to bankruptcy leads to a higher post-bankruptcy credit score than if your report contained derogatory information prior to the filing.

Fact #1: While intuitively this logic might make sense — better credit management prior to the bankruptcy means lower future credit risk? — the reality is that a positive payment history on an account prior to it being included in bankruptcy does very little toward minimizing the damage to your score. Simply the presence of bankruptcy information on the credit report and, most importantly, the length of time since the information first appeared, are the strongest determining factors.

[Credit Score Tool: Get your free credit score and report card from Credit.com]

Free Credit Check ToolMyth #2:  All bankruptcy information stays on your credit report for 10 years, without exception.

Fact #2: Actually, only the public record of a Chapter 7 bankruptcy lasts for 10 years. All other bankruptcy references on a credit report remain for 7 years, such as:

  • Trade lines indicating “Account included in bankruptcy”
  • Third-party collection debts, judgements and tax liens discharged through bankruptcy
  • Chapter 13 public record items

Myth #3:  You will have a low credit score for as long as the bankruptcy information remains on your credit report.

Fact #3: While it’s true that you should not expect a high score following bankruptcy, if you manage your credit optimally in its aftermath you can be looking at a 700 score or higher after only about 4-5 years. Such a speedy score recovery requires a few things though:

  • Adding “positive” credit, such as secured credit cards and installment loans, to help offset the negatives on the credit report
  • On-time payments on all remaining and recently acquired debt
  • Low balances on credit cards that make up less than 25 percent of the credit limits

[Related Article: 8 Credit Score Myths Debunked]

Myth #4:  A bankruptcy will impact all consumers similarly, regardless of the amount of debt discharged or the number of debts included in the bankruptcy.

Fact #4:  Not true, as certain credit scoring factors specifically evaluate the magnitude of the bankruptcy, such as the amount of debt discharged and the proportion of negative to positive accounts on the credit report. This means that a relatively low debt total spread over only a few accounts included in bankruptcy can lead to a higher post-bankruptcy score than one for which the scope of the bankruptcy is more extensive.

Myth #5:  Any credit history associated with accounts included in bankruptcy will be removed from your credit report.

Fact #5:  On the contrary, all of the bankruptcy-related history continues to appear on your credit report and is considered by the scoring formulas for the entire 7 to 10 post-bankruptcy years, though the negative impact diminishes over time.

So, before taking the big leap into bankruptcy, consult a bankruptcy attorney and learn the facts about how credit scores treat bankruptcy. You just may be able to minimize the damage and get a jump on re-establishing your credit after filing. If you want to know where your credit score stands following your bankruptcy, you can use a service like Credit.com’s Credit Report Card, which offers you a free credit score once a month.

[Free Resource: Check your credit score and report card for free with Credit.com]

Image: iStockphoto

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Pingback: 7 Facts About Collections and Credit Scores | Credit.com News + Advice()

  • Pingback: 3 Reasons Paying Off Student Loans With Credit Is A Terrible Idea | cumulusreport.com / nimbusreport.com()

  • http://none Wendy dorr

    Can anyone suggest a credit card for someone with a low credit score? one with no annual fee and decent terms. also, what is a secured credit card–tell me if you’ve had experience with this thanks, Wendy

    • http://www.credit.com Barry Paperno

      Hi Wendy, While not being able to tell you exactly which card is best for your situation, for someone with a low score I would highly recommend a secured card. While I can’t promise there will be a no-fee card of any kind available to people with low scores, you should be able to find a secured card with a low annual fee and good terms, with the best secured cards reported to the credit bureaus monthly where they help to build credit scores just like unsecured cards. And just like with unsecured cards, you can make minimum monthly payments or pay in full each month to avoid finance charges; and most secured cards convert to unsecured after you establish a good payment history. Here are a few secured cards to choose from: http://www.credit.com/credit-cards/bad-credit/. Hopefully, some of our readers will weigh in with their best card suggestions. -Barry

  • Dominique

    Hello. I live in a community property state and my scores are in the 800’s. I purchased a car on my own without my husband. My husband has to file bankruptcy for all the debt he acquired before our marriage. How many points will my credit score be affected for his bankruptcy? Will it hit my credit hard if I’m not on any of his debt obligations?

    • Credit.com

      Dominique – As long as you’re not on the debts being included in bankruptcy, your husband filing won’t affect your credit scores at all. The only time it would is if you were on the accounts and the accounts were reported in your credit reports. However, if you are in a community property state, and your husband’s debts were incurred after your marriage, the collector’s may attempt to try and collect the debts from you. It would depend on the what the debts are and the individual laws in your state but it’s something to keep in mind.

  • margaret

    I am considering filing bankruptcy but am hesitant because I am on a few accounts with my children. I am not the primary cardholder with a discover card, but am on my daughter’s card, and am on a chase account with my son. Both of these accounts are in good standing and have excellent payment history. Will either of these be affected if I file for my own personal debts that are only in my name?

    • Deanna Templeton

      Margaret – Whether or not filing bankruptcy will impact your children really depends on whether or not you include the cards in bankruptcy and how your children are listed on the accounts.

      If you file bankruptcy and include the cards, it will definitely affect any primary or joint account holders listed on the card, regardless of how impeccable the cards have been managed to date. This is one of the major drawbacks of joint and co-signed accounts, and the reason why we try to discourage consumers from co-signing or applying jointly for friends or family members. If one person defaults, both will pay the price as far as your credit is concerned. Filing bankruptcy will release you from the liability on the cards, but if your children are joint or primary cardholders, they will still be held liable for the debts.

      On the other hand, if your children are listed as authorized users, any damage caused by bankruptcy can be avoided. If this is the case, as the primary accountholder you can call and have them removed as authorized users and the bankruptcy won’t impact them at all.

      For the Discover card, you mention that you’re not the primary cardholder so the same holds true — if you’re a joint accountholder, it will hurt the both parties on the account. However, if you’re an authorized user, you’re not legally liable for the debt so you wouldn’t be able to include the account in bankruptcy anyway.

      If you’re considering bankruptcy, I’d urge you to consult with a bankruptcy attorney. In some cases, even though you may not want to include certain credit card accounts in the bankruptcy filing, you may not have that option. A bankruptcy attorney would be able examine your individual financial situation and advise you accordingly.

  • http://www.credit.com/ Credit.com Credit Experts

    Luisa – recovering from bankruptcy can be a slow gradual process but you CAN recover. Because your bankruptcy is already four years old, your scores should begin improving gradually — but only if you’re adding new positive information to your reports to help counteract the old negative information. Bankruptcy records remain for a minimum of 7 years, a maximum of 10 years but the older they get, the less impact they’ll have. For more about how long bankruptcies are reported in your credit reports, this should help:

    When WIll My Bankruptcy Stop Staining My Credit Reports?

    And to to give you a better understanding of how bankruptcies impact your credit, and how best to recover from the damage they cause — the following resources are excellent as well:

    How Can I Get a Mortgage After Credit Problems
    How to Rebuild Your Credit

  • Christopher H

    Hello my brother helped co-sign for a loan on a car. And I screwed it up to the point that it was reposed, we have been sued in a civil court case. He filed for bankruptcy and his lawyer told us that all will be dismissed. But I still see it on public records and affecting my credit. What would you suggest I do next. I’m not trying to run away from the problem. I want to come out of the shadows. Thanks

    • http://www.Credit.com/ Gerri Detweiler

      If you didn’t file for bankruptcy then they can still pursue you for payment, depending on the statute of limitations. In addition, you may get a 1099-c reporting it as cancelled debt.

      Have you talked with a consumer bankruptcy attorney yourself?

      • Christopher H

        No I haven’t. I might just talk to one of their counselors and see what can be done

        • http://www.Credit.com/ Gerri Detweiler

          You’re welcome. Let us know what happens and if you have further questions. Hope you’re able to find a way to put this behind you.

      • Christopher H

        Thank you for replying btw, I appreciate your time.

  • http://www.Credit.com/ Gerri Detweiler

    It means your bankruptcy case was dismissed. You are no longer protected by the court. Creditors may try to collect from you.

  • http://www.Credit.com/ Gerri Detweiler

    Sorry to be the bearer of bad news but dismissed bankruptcies remain on your credit reports for the full ten years. It’s too bad you didn’t know that going in.

  • http://www.Credit.com/ Gerri Detweiler

    In some cases, yes.

  • http://www.Credit.com/ Gerri Detweiler

    That’s a question for your bankruptcy attorney. He or she can tell you whether you must discharge all your debts. If you can’t keep the bank loan you can certainly start to rebuild credit with a secured card when your case is completed.

  • http://www.Credit.com/ Gerri Detweiler

    I have absolutely no idea, and the reason I say that is your new credit score will depend on everything in your credit reports after the bankruptcy is gone. Do you have current positive credit references, low debt and an established credit history since the bankruptcy? If so then you could see it rise significantly. If you haven’t done so, you may want to get your free credit report card and see how you score for the various factors.

  • http://www.Credit.com/ Gerri Detweiler

    I can’t give you legal advice but from what I’ve heard from other consumers, you want to be thorough.

  • Shannon Yoshikawa

    In some cases yes

  • Michelle

    My chapter 13 was just removed from my credit report. How long will it take until I see an increase in my credit score. Also I have two property tax liens that have been released. Will this increase my score or when will it disappear from my credit.

    • http://www.Credit.com/ Gerri Detweiler

      Credit scores are calculated based on the information available at the time the report or score is requested. So the next time your credit report is used to calculate a credit score it will be based on the report that doesn’t have a bankruptcy listed.

      As for the second part of your question, this article may help: How to Make Your Tax Lien Disappear

  • jason polanco

    Hello. I filed Bankruptcy (chapter 13) on Aug 2012 and was discharged on march 2014. I had 2 credit cards, 1 line of credit, and 1 mortgage that I did not include on my Chapter 13. My 2 credit cards and my line of credit show as “current” on my credit report. However, my mortgage shows as “Included on Chapter 13″. I contacted Expedia and Equifax to address the issue and the send me to contact the vendor (Wells Fargo) directly. However, Wells Fargo states that they are reporting the information as they should and if there is an problem, I should talk to the bureaus. Please advise and help.

    • http://www.Credit.com/ Gerri Detweiler

      Have you talked with your bankruptcy attorney? That’s the first place I would suggest you start. To protect your rights under the FCRA, you must dispute the incorrect information with the credit reporting agencies that are reporting it. Include your proof (your bankruptcy papers showing the debts that were included). If that doesn’t fix it you can talk with a consumer law attorney with experience in FCRA matters or file a complaint with the CFPB. Please read: A Step-By-Step Guide to Disputing Credit Report Mistakes

  • http://www.Credit.com/ Gerri Detweiler

    I posed this question to consumer protection attorney Jeremy Golden with GoldenCardona.com. Here’s what he said:

    The bank should only report the negative information 7 years + 180 days from the first delinquency. The bankruptcy or foreclosure date should not extend the reporting period from the bank. If the foreclosure created a public record then the credit bureau could pick that information up from the public records and report it for seven years.

    You may want to talk with your bankruptcy attorney for further information.

  • hwy505

    I will be discharged for two years. Since the discharge I have gotten numerous credit cards, three auto loans, and was just approved for a mortgage. All this in under 24 months of rebuilding my credit. I use the cards every month and pay the balance every month – I keep my debt to credit ratio around 6%. For one year I saved and saved – that in itself showed the underwriters for my new house responsibility on my part. It is possible to recover from BK in a VERY short period of time depending on your economic makeup.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.