Each year, close to half a million (50%) of Americans file for bankruptcy.
Bankruptcies could stay in your report for up to a decade, depending on the category of the bankruptcy.
As a financial red flag in handling credit, assuming that bankruptcy is a result of fraud like identity theft or common errors could make you suffer severe consequences for almost a decade.
Having a bankruptcy in your report can be an enormous brick wall that hinders you from making progress and damages your fiscal health severely.
Usually, it’s not in the interest of lenders to hide bankruptcy – they would use it as a reason to reject your loan application or give you incredibly expensive interest rates.
With so many people filing for bankruptcy, consequently having bad credit scores, you might find comfort in being part of the masses, but the best thing is fixing the issue and dropping it off your account.
How to Remove Bankruptcy from Credit Report
Essentially, a bankruptcy entails a court proceeding in which a court and judge investigate the assets and liabilities of people and institutions that can’t clear their bills on time, and decide to discharge those responsibilities so that they’re no longer obligated to pay them.
While this may sound like the right decision that offsets lots of fiscal responsibilities from people and businesses, legal teams see that consumers and business owners with collapsed enterprises deserve a second chance.
In 2019 alone, over 770,000 bankruptcies were filed, and a majority of them were filed by individuals (97%).
Most people who filed chapter 7 bankruptcies had a net annual income of about $30,000, while chapter 13 bankruptcies were constituted by people with slightly higher income – $40,000 annually.
For several businesses, the primary motivation for filing bankruptcy is to start over again with a clean record and avoid phone calls, letters, and collection attempts by credit collection agencies.
Legally, creditors are prevented from filing any lawsuit against you or imposing liens in an attempt to get their debt paid back. It also prevents occurrences of things like evictions, garnishments, and utility disconnections.
Generally, filing bankruptcy takes at least six months to complete – an incredibly daunting and lengthy process that has a mammoth of downsides and a few perks.
The period through which bankruptcy stays in your report
The bankruptcy record falls off after seven or ten years – depending on the type you filed.
A chapter 13 bankruptcy would fall off after seven years while a chapter 7 bankruptcy stays for up to a decade.
Each year, chapter 7 bankruptcies account for over 70% of the cases, making it account for a majority of the files bankruptcies.
The relatively straightforward way to handle chapter 7 bankruptcies partly accounts for this enormous percentage of filed cases – unlike chapter 13 bankruptcies that are a bit more complicated.
While most people might think that eventually paying their creditors with slightly different terms and conditions would clear the bankruptcy files, removing them isn’t as straightforward as it sounds. This is because, unlike chapter 7 bankruptcies, you’ll have to strike new pay-off deals with each creditor.
Chapter 7 bankruptcies, on the other hand, are pretty easy to deal with since they don’t include long-term payment plans.
Regardless of the type of bankruptcy included in your report, individual accounts are often deleted before filing the bankruptcy.
According to Experian – one of the credit reporting agencies – bankruptcies appear in accounts whose owners have severe issues with clearing outstanding delinquencies.
Even though delinquent accounts are deleted seven years from the first delinquency report, declaring bankruptcy wouldn’t affect the time a delinquent account stays in the report.
Contrary to the popular belief that you have to wait for this period to elapse before you start working on removing the bankruptcy, the good news is that you can delete it before this time elapses.
Rather than staying in a cycle of debts and stuck with high-interest rates and low credit balances, you can take legal steps and recover from the financial effects of bankruptcy.
Impact of bankruptcy on your credit score
There is a fine between how bankruptcy affects your credit score and your report.
According to FICO, someone with a score of 800 points would experience a score surge by approximately 130 points due to bankruptcy.
This sudden plummet would not only drop you several categories lower but also reduce your eligibility for future loans and make you pay high-interest rates and reduces your access to quality loans.
Filing a bankruptcy may sound like a great credit decision, but you have to consider long-term effects and how it can cripple your fiscal health.
How bankruptcy affects your credit report
Bankruptcy would affect your report in two significant ways – the filing and the accounts included in the bankruptcy.
There will be an entry on your report showing that you filed the bankruptcy, and it will include details such as your SSN and filing date.
Besides, all accounts in which you filed the bankruptcy would show on your report. Every account would have its line item entry and remain in the account for up to 7 to 10 years.
Typically, bankruptcies would negatively affect your credit report, and the severity of the effects would depend on the type of bankruptcy and the period through which it has stayed in your report.
If you have several accounts, each with a filed bankruptcy, the severity of their effects would certainly be more than that of a single account.
Effects of bankruptcy on getting a new job
Employers are allowed to perform a soft inquiry to evaluate the strength and responsibility of their applicants as well as existing employees if they want to renew contracts or promote them.
The prospective employer would notify you that they want to perform an inquiry and require written permission from you.
Most companies perform credit inquiries on strong candidates, and receiving a request for authorization means you’re a potentially strong candidate.
However, bankruptcies could make your application hit a dead end, especially if you’re applying for financial or managerial positions.
According to the bankruptcy law, neither government institutions nor private companies can fire nor retrench you because of bankruptcy. However, when it comes to new employers, the law is unclear, and some potential employers could deny you a job because of bankruptcy.
Most employers use your credit report to access your competence in handling sensitive information and finances. If you have a bankruptcy, they might think you have a motivation to steal, and they would not be comfortable hiring you.
In New York, for instance, courts have ruled that new employers shouldn’t deny you a job because of bankruptcy, while Florida, Mississippi, and Pennsylvania have ruled otherwise.
The disparity in rules between different states makes people strive to have their debts wiped from their credit reports to stand better chances of getting a better job.
Can bankruptcy be deleted from my report?
The Fair Credit Reporting Act (FCRA) demands that credit bureaus should provide accurate information-
including negative items, paid collections, bankruptcies, and several others.
Credit bureaus often have online campaigns that make it seem incredibly hard to remove such bankruptcies, and their interpretation of the FCRA is somewhat wrong.
However, bankruptcies can be removed from your report.
What you need to remember is that while you can enjoy certain privileges documented by the FCRA, you always need to provide accurate information to avoid violating any set protocol.
Checking your reports for any errors
The preliminary step you should take is to retrieve your reports from each of the three credit information centers.
Keep in mind that you’re eligible to receive a free credit report each year from the information centers – TransUnion, Experian, and Equifax – but the recommended frequency for checking is three months.
Carefully go through each entity in detail and check if you have any errors.
It is common to find erroneous data items like your SSN, date of account opening, or extreme scenarios like inaccurate delinquencies.
You should also check for a fraudulent activity like identity theft, cybercrime, and impersonations that someone might have used to file bankruptcy using your details.
If you find any errors, dispute it with the respective credit bureau to be deleted from your report.
Bankruptcy as a result of fraudulent activity
Perhaps cybercrime and fraud would be a thing of the past someday, but for now, it’s part of life, and you wouldn’t know if you’re the next victim.
While the effects of bankruptcy that emanated from fraud may be similar to those emanating from legitimately-filed entries, you need to challenge it with three credit bureaus.
If you find something weird in your report, you should file a dispute using a letter with a statement from the court of record.
The preliminary step is contacting the court and requesting them for a written verification that you didn’t have a bankruptcy on your file. If the court has a recorded bankruptcy, you’ll need to work on resolving the issue first.
Obtain the relevant documents from the court then forward them along with copies of your identification using certified mail to the three credit information centers.
Usually, it might take a couple of weeks for the bureaus to record modifications on your reports – which applies if everything you sent is accurate and up to date.
This may seem like an incredibly hard task, but you certainly don’t want to pay lots of bucks for a mistake you didn’t make.
Disputing inaccurate entries
If you find inaccuracies or errors on your report, you should use a credit dispute letter to raise a complaint.
Keep in mind that there is a significant disparity in the information stored in each credit bureau – so you should check all reports that you’ve retrieved from the three data centers.
It’s not uncommon to find some inaccuracies in at least one of the reports, and if this is the case, file a dispute with the respective bureau.
The best scenario occurs when the bureau is unable to verify information about the bankruptcy, especially if it is old. In such a case, they’ll delete it from your report.
The older the bankruptcy, the higher the odds of its removal since new bankruptcies often have readily verifiable information that would significantly reduce the efforts of the information centers to verify the same.
Sending a procedural request letter
If the credit bureau verifies the entry and finds it accurate, you’ll need to write them a procedural request letter, asking them about the person with whom they confirmed the bankruptcy.
In most cases, credit bureaus will argue that they verified the entries with the courts in their response.
This may sound untrue since courts hardly verify bankruptcies for the information centers.
You should proceed to the next step to ask the courts how they verified the entries.
Often, the credit data center will specify the court that helped verify the information, and you’ll need to contact the respective court.
Ask them the procedure they used to verify the entity – they’ll likely respond, arguing that they didn’t confirm anything, but you should insist on having the same communication presented in writing.
Once you’ve received the written communication, forward it to the respective bureau and demand that they delete the bankruptcy.
Should they try and counter your claims with credit complexities, use the letter as your defense and argue that they violated the Fair Credit Reporting Act regulation as you demand it to get deleted.
While this process might not have a guarantee for efficacy, you’ll need patience and consistency to guarantee results.
Nonetheless, it has worked for other people, so it certainly would be worth a try if you’re up for it.
Using professional service providers
Companies that specialize in removing bankruptcies have a well-defined legal system consisting of advocates and lawyers that would do everything on your behalf.
Arguably, some experts claim that using credit repair companies isn’t the way to go since the FCRA has the legal right to document any information that is accurate and up to date.
However, analyzing it from a different perspective reveals that using a credit company would save you lots of time, money, and energy as you wouldn’t necessarily have to write lots of letters and have countless communication sessions.
So using a credit repair company would be one of the most effective and fastest ways to remove bankruptcy from your report.
Rebuilding credit after bankruptcy
Maintaining healthy fiscal habits is undoubtedly the best way to avoid any occurrence of bankruptcies in the future. Stick to a reasonable budget and build practical approaches to save money that would be a cushion in case of an emergency.
Besides, you’ll need to have strategic ways to show that you’re responsible – which certainly excludes taking new loans that might accrue interests and charges.
Among these ways is applying for a secured credit card, which you’ll back with a deposit that works as collateral.
While secured cards have high-interest rates and high APRs, you can use it to grow your credit score and work towards being eligible for better, secured cards.
Besides, you can apply for a secured loan from financial institutions and unions that are willing to lend money as long as it’s secured with collateral – preferably cash deposit. Since they already have collateral and the risk for defaulting is generally low, loan issuers are more willing to give you secured loans that might be significantly low, but proper utilization would work in your favor.
As your score rises, make sure to check your credit reports from the three information centers frequently and dispute any inaccuracies if you find some.
Although growing credit after removing bankruptcies from your report requires lots of patience and consistency, you’ll find that you’re eligible for a car or mortgage loan with time.
Conclusion
If you’re sick of a bad credit report and having to go through countless hurdles before getting favorable interest rates, deleting the bankruptcy from your report is the best way.
Bankruptcy would not only cripple your negotiating power but also pose severe risks like losing your home or car.
The exciting thing is that you can check your credit report once a year – for free – from each of the three credit data centers, check for errors, and dispute any bankruptcies present.
Overall, maintaining good fiscal habits, making a budget, and solid plans to pay all debts is the most effective way to avoid bankruptcies.
