Advantages and disadvantages of bankruptcy

Depending on your financial condition, bankruptcy is a special civil proceeding that can be used to reorganize or reduce debt. Bankruptcy can be a good idea for someone who is overwhelmed with debt, but it can also have a detrimental impact on someone’s credit. Bankruptcy filings will typically stay on a credit report for up to ten years after filing for bankruptcy.

Filing for bankruptcy is the nuclear option a solution for someone’s financial problems. It may allow them to wipe many kinds of debts and liabilities, but it can cause plenty of collateral damage in the process. We’ll see in more detail below what are the consequences of bankruptcy.

The good news is that if the right measures are taken, credit scores will eventually improve. Let’s look a little more in-depth at what happens when someone files for bankruptcy.

The impact of bankruptcy on your credit report

After filing for bankruptcy, a public record may appear on your credit report. This will most likely have a negative effect on your credit as long as it is on your credit report.

A Chapter 7 bankruptcy filing may appear on your credit reports for up to ten years after filing. As specified in the Fair Credit Reporting Act (FCRA). A discharged Chapter 13 bankruptcy may remain on your credit report for seven years from the date of the bankruptcy filing. If the bankruptcy is not discharged successfully, the public record could remain on your credit report for up to ten years if those conditions are not met. Regardless, a Chapter 13 public record will have a detrimental effect on your credit scores.

Your FICO score may substantially go down as a result of a bankruptcy filing. If your payment history was in decent shape prior to filing for bankruptcy, the score reduction will be much harder than if you already had a spotty payment history. However, the effect of bankruptcy on someone’s credit varies greatly, partly due to the various factors that make up each person’s credit.

Accounts and how they appear on your credit reports

You probably had debts you couldn’t pay before filing for bankruptcy — credit cards, medical debt, and so on.

Those accounts will also appear on your credit reports if you include them in a bankruptcy filing. Accounts that have been discharged in bankruptcy can be reported with a zero balance as “discharged” or “included in bankruptcy.” They will continue to show up on your files even though you don’t longer legally owe them. However, if you apply for credit, lenders will still be able to see them in the credit report and rely on them to reject a credit application.

But it is not all bad news. Accounts included in a bankruptcy filing will no longer be listed as “unpaid” or “past due”. After 7 to 10 years, any mention of them will completely disappear from your credit report. Even before the fall off, as these accounts age, they will affect your credit score less and less.


Make no mistake. Filing for bankruptcy is not a decision that should be taken likely. It will negatively affect your credit for a good number of years. But in some cases, it may be the best option to get a fresh start.