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Effects of Chapter 7 bankruptcy on credit reports

Many people think of a bankruptcy filing as a "last resort" to deal with insurmountable debt. While Chapter 7 and, to a lesser extent, Chapter 13 filings are often used when other tactics have failed to decrease debt, this does not mean Kentucky residents who choose bankruptcy as an option are committing to a life of fiscal ruin. Indeed, there are many ways bankruptcy can be mitigated even while still being listed on a credit report.

It is important to understand the difference between a Chapter 7 liquidation and a Chapter 13 reorganization, as the choice between the two influences how long it appears on a credit report. A Chapter 13 filing is a reorganization of debt that allows the debtor to work with the bankruptcy court and his or her creditors to develop a payment plan to work down debt. Chapter 13 typically stays on a credit report for seven years.

A Chapter 7 filing is the more commonly understood form of bankruptcy, wherein assets are liquidated to pay down existing debts. In some cases, certain unsecured debt, including credit cards and medical expenses, can be discharged altogether by the court. This filing tends to stay on a credit report for 10 years. In both cases, however, it is possible to rebuild credit during that intervening time. For example, seeking out small, easily paid loans and paying them off on time, or applying for a secured, low-limit credit card, can help a debtor to improve a credit score, even with a bankruptcy still on file.

Bankruptcy, be it Chapter 7 or Chapter 13, is not the end of the world. Kentucky residents facing insurmountable debt could benefit from learning more about these options, as they can be used to help dispel the specter of debt from the lives of families across the state. The support of a bankruptcy attorney and other financial professionals can be invaluable in understanding this complicated process.

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