How Long Does Chapter 7 Bankruptcy Stay on Your Credit?

Significance

Filing for bankruptcy is significant for a person's credit history because the debtor basically admits that she cannot afford to pay off money she borrowed. Lenders typically look at a borrower's past history to determine the level of risk the institution would face if it lent money to the borrower. Having a bankruptcy on the credit history would demonstrate to a lender that lending money to that borrower would pose a substantial risk.

In a Chapter 7 bankruptcy, a debtor files a petition declaring that he does not have enough income to satisfy even the minimum payments on all his current liabilities. The bankruptcy court takes inventory of all the debtor's assets. The bankruptcy court will appoint a trustee that is responsible for overseeing the sale of the debtor's assets. The trustee will use the proceeds from the sale to pay off debts in order of priority. Federal and state law, however, exempt certain assets from bankruptcy, so a debtor in Chapter 7 will not lose all his assets.

Creditors look at past history to help predict future behavior. Individuals with high credit scores will typically have little to no trouble obtaining loans, mortgages or lines of credit. An individual with a low credit score and negative credit history may have trouble obtaining any credit. If such an individual can obtain credit, the credit will likely carry a high interest rate. Lenders impose high interest rates on risky borrowers to hedge against the risk that they will default.

Pursuant to the Fair Credit Reporting Act, credit reporting agencies may list negative information on a consumer's credit history for up to seven years. Typical negative history may include things like a car repossession, home foreclosure or wage garnishment. However, credit reporting agencies can list bankruptcy information for up to 10 years on a consumer's credit report. Therefore, Chapter 7 liquidation bankruptcies will remain on a consumer's credit report 10 years.

Bankruptcy should only be pursued after carefully considering all options with a qualified attorney licensed to practice in the state where the debtor lives.