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Bankruptcy and credit reports

Credit reports play a large role when it comes to an individual's ability to obtain credit cards and loans. Unfortunately, bankruptcy can affect a credit report or score in a way that reduces the chances of obtaining this financing. But there are ways to minimize its impact.

A bankruptcy filing generally remain on credit reports for up to 10 years before they are removed. Its impact depends on the type of bankruptcy, however.

A Chapter 7 bankruptcy is used by debtors who defaulted on their loans and covers credit card debt, medical bills and personal loans. It does not deal with student loans, taxes, criminal fines and spousal or child support. To qualify for this type of bankruptcy, a debtor must pass a means test. Once that occurs, their vehicles, valuables and other property may be liquidated to resolve as much of the debt as possible. Some essential assets such as a home or work computer may be exempt from this liquidation process. Chapter 7 has a negative impact on credit reports for 10 years from the date of filing. These filings could cause a drop of 200 points on these reports. Debts erased by filings are also included.

A Chapter 13 bankruptcy, on the other hand, is for debtors who earn too much to qualify for Chapter 7 but cannot meet creditors' demands. A Chapter 13 filing can have a negative impact on credit scores and remain there for seven years. A debtor must obtain court approval for any loans during that time. Under this type of bankruptcy, a court-created payment plan requires repayment of debt over three to five years. Any remaining debts are then eliminated. Chapter 13 allows repayment of some debt while allowing a debtor to keep cars, jewelry and other property.

Sometimes, bankruptcy may be eliminated from credit reports before 10 years. Reports should be closely scrutinized for errors with regard to personal information, debts, creditors or timelines. Disputes should be filed with the credit bureau. A debtor should file a dispute if a bankruptcy was not removed after the expiration date.

After debts are discharged, credit reports should be reviewed to assure that only accounts that were involved in the bankruptcy were reported. Any mistakes can further drop credit ratings and should be disputed.

Sometimes, debt settlement and consolidation can be used instead of bankruptcy. But filing for bankruptcy may be unavoidable where, for example, debts are rampant and exceed 50 percent of annual income. An attorney can help review options and pursue a reasonable plan.

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