Bankruptcy Filings Up 9% in 2010

According to the American Bankruptcy Institute consumer bankruptcies in 2010 rose by 9% over 2009.  The raw number will pass 1.53 million filings.   What does this mean for consumers and their credit standings?

Consumers can normally file two types of bankruptcy; Chapter 7 or Chapter 13.  A Chapter 7 is referred to as a “straight bankruptcy” or “liquidation” and will fully discharge (cancel) all statutorily dischargeable debts, such as credit card debt.  A Chapter 13 is referred to as a “Wage Earner Plan” and requires the consumer to pay a trustee of the bankruptcy court who then pays your creditors.  A Chapter 13 is an option for consumers who have steady income.

Chapter 7 bankruptcies remain on your credit files for 10 years from the filing date.  Chapter 13 bankruptcies remain on your credit files for 7 years from the discharge date, but not to exceed 10 years.  Most Chapter 13s take 3-5 years to discharge so they almost always remain on your credit files for 10 years.

The credit reporting agencies use a service called PACER (Public Access to Court Electronic Records) to retrieve bankruptcy filings from the bankruptcy court records.  Once your bankruptcy is filed with the court it will show up on your credit files within days.  And, they don’t miss filings so don’t expect them to overlook your filing.

There is no credit score impact difference between a Chapter 7 and a Chapter 13.  The impact to your credit will be the same because the impact of the filing is equal regardless of the bankruptcy type.  This is hard to believe because in a 13 you’re at least making payments.  But, the incident of filing is what’s important to your score…not that you’re making payments.

The impact to your score is going to vary based on what your score was prior to filing bankruptcy.  If you have a very strong FICO score (750+) then you should expect a 200-300 point hit.  If your FICO score is already poor, which it probably will be, then the impact will be much less.  Scores tend to be like water, they’re going to take the path of least resistance.

Some impact to your score will endure the entire time the bankruptcy is on your credit reports.  However, the impact won’t be the same the entire 10 years.  As time goes by and the bankruptcy gets older the impact will lessen.  In fact, within a few years your scores can be very respectable, especially if you’ve started to rebuild your credit and have managed it properly.

John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and a Contributor for the National Foundation for Credit Counseling.  He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry.

Categorised in: Bankruptcy, Credit Report, Credit Score, Financial, Getting Credit, Improving Credit

This post was written by John Ulzheimer