7 Common Bankruptcy Myths About How It Impacts Your Credit

Bankruptcy is often the last resort for people who have accrued a significant amount of debt that they can’t pay off. Because it’s such a difficult step to take, many people worry about the impact it will have on their credit. Unfortunately, there are many common bankruptcy myths floating around.

#1- Your credit score will be low as long as bankruptcy remains on your report.

In truth, bankruptcy will dramatically lower your credit score, but it’s possible to build it back up by properly managing your credit. After a few years, you might be able to reach good credit status again.

#2- Bankruptcy information always stays on your credit report for 10 years.

Only Chapter 7 bankruptcies remain on your credit report for 10 years. All other bankruptcy-related files remain on credit reports for seven years.

#3- If you only had positive information on your report before bankruptcy, you will have a higher post-bankruptcy score.

Truthfully, having positive payment history and lacking negative accounts on your report does very little to reduce the burden of bankruptcy. The mere presence of a bankruptcy and the length of time it is on the report will be one of the key factors in post-bankruptcy scores.

#4- Bankruptcy impacts all consumers equally.

Your credit score, amount of debt discharged, and the negative to positive proportion on your report will factor into the impact bankruptcy has on your future finances. A low amount of debt declared may make it to where you’re not as severely impacted as those with higher levels of debt.

#5- You won’t be able to get a loan or line of credit after bankruptcy.

There are ways to repair your credit following bankruptcy. For example, getting a secured line of credit (one requiring a security deposit upfront) can help. In addition, credit builder loans, CDs, or passbooks use deposits or collateral to help individuals build credit again.

#6- Bankruptcy will permanently ruin your credit.

Bankruptcy will damage your credit, but it only stays on your report for 10 years at the most. After that, you can start working to repair your credit. Maintaining smart spending habits and slowly building credit again can help improve your credit score following a bankruptcy. 

#7- Bankruptcy-it removes related debts from your credit report.

Bankruptcy helps individuals erase or pay off the debt they have declared. It does not remove the debts from a person’s credit report. The accounts remain on the report record and will impact the credit score for seven to 10 years.

Understanding these common bankruptcy myths is a good first start. To learn more about the true impact of bankruptcy, it’s good to speak with a financial advisor or credit professional so that you’re fully aware of what may actually occur if you decide that filing bankruptcy is your best option.