About Chapter 7

• During Chapter 7 bankruptcy, an individual must disclose her debts and assets to the bankruptcy trustee. The trustee then liquidates the debtor's non-exempt assets to pay off as many of her creditors as possible. If the individual's assets are not worth enough money to pay off all of her creditors, the court discharges her liability to any remaining debts she owes. This often results in some creditors going without payment.
  
  

Filing and Reporting

• The court records each bankruptcy filing as a public record. The public records are then entered into a database and registered by each of the credit bureaus. Thus, when a debtor files for Chapter 7 bankruptcy, the bankruptcy appears on his credit report. Should the debtor change his mind about his bankruptcy, he may request that the court dismiss his bankruptcy petition, but doing so does not erase the bankruptcy from his credit records. A bankruptcy can result in a credit score loss of up to 300 points.
  
  

Time Frame

• The Fair Credit Reporting Act sets the legal reporting period for all credit report entries. The reporting period for Chapter 7 bankruptcy is 10 years. Thus, a record of the fact that the individual filed for bankruptcy will still be apparent on her credit report long after she recovers from her debt problems and regains financial stability. Fortunately, however, the FICO credit scoring formula places less importance on older reports. The more time passes, the less negative impact it has on her credit score.
  
  

Effects

• When applying for a loan or new credit, an applicant must often submit to a credit check. The lender reviews his credit report to evaluate any risk factors associated with lending to him. A past bankruptcy is a significant risk factor. Regardless of the circumstances that made a Chapter 7 bankruptcy inevitable, all a lender sees is the fact that the individual was not able to properly manage his debts and pay off his creditors on his own. This can result in the consumer paying higher interest rates on credit cards and loans---if he gets approved at all. Some lenders, such as mortgage lenders, include the question, "Have you ever filed for bankruptcy?" on their loan applications. The individual must answer the question honestly, even if the bankruptcy has long since vanished from his credit file.
  
  

Considerations

• Lenders aren't the only ones who check credit to determine risk. Some employers also review the credit reports of applicants. Employers often review credit reports to determine how deeply in debt an applicant is. The more debt an individual carries, the greater a theft risk she may be to the company. In this situation, having a Chapter 7 bankruptcy on file may be beneficial. By filing for bankruptcy, the debtor can pay off and discharge her outstanding debts. After the court discharges her case, the individual carries no large debts. Thus she presents a much lower theft risk to a company than someone deeply in debt and struggling to pay bills.