How will my credit be damaged if I file for bankruptcy?

By far the most common fear that people have when contemplating Chapter 7 bankruptcy is the impact it will have on their credit report in the future.

There’s bad news and good news here.  The bad news is that your bankruptcy filing can show up on your credit report for as long as ten years from the date of filing.  So if someone looks at your credit report in the next decade, they’re going to learn of your bankruptcy case.

There is, however, good news.  Credit reporting is always an issue of recency – in other words, what you’ve done in the recent past is weighed far more heavily than events long ago.  When you file for Chapter 7 bankruptcy, that filing is fresh.  The negative sting, if any, on your report is raw.  But as time goes by and you have the chance to put new, positive payment information between you and the bankruptcy you will see your score inch up.

That’s one of the silver linings of student loans not being discharged in a routine Chapter 7 bankruptcy case.  So long as you continue making payments in a timely manner post-bankruptcy, that positive payment stream will help to raise your score.

But the question of your credit report after Chapter 7 bankruptcy fails to recognize one major sticking point, and that’s your current credit score.  If you’re walking into Chapter 7 bankruptcy then chances are good that you’re behind on your bill payment.  Your credit likely looks like swiss cheese, and no decent lender is going to consider extending credit to you.

So let’s say you don’t file for bankruptcy.  What is your credit score going to look like in two years?  More to the point, will you likely have any money saved in two years, thereby reducing the chances that you’re going to need to borrow money in the first place?

If you do nothing, your credit score will remain awful indefinitely.  But if you file for Chapter 7 bankruptcy and cut the losses now, at least you’ve got a fighting chance.

It’s your choice.  But if you’re looking at a long-term personal finance recovery, the decision should be obvious.