Virginia debtors will experience both short- and long-term effects after filing for bankruptcy. Typically, people falling behind on payments have declining credit scores. Although declaring bankruptcy represents a negative on a credit report, people often gain points on their credit reports in the immediate aftermath. Researchers determined that the short-term rebound occurs because the debtors’ scores had dropped so low that the initial clearing out of debt improves their ratings.
One analysis of bankruptcies done by a Federal Reserve bank of New York economist showed that some debtors experienced a gradual rise in credit scores. Their average scores hit low marks of 520 to 530 before recovering somewhat after a bankruptcy.
Despite the short-term improvement, bankruptcy creates a long-term red flag on a debtor’s credit report for seven to ten years. Two credit bureaus, TransUnion and Experian, kept Chapter 7 bankruptcies on people’s records for 10 years and Chapter 13 bankruptcies for seven years. They treated Chapter 13 differently because it represented a partial payment of debts unless a debtor failed to complete the bankruptcy plan. Until recently, another credit bureau, Equifax, flagged people’s credit reports for a full 10 years if they did not successfully complete a Chapter 13 plan. During the time that a bankruptcy appears on someone’s credit report, basic needs like renting an apartment or hooking up utilities could be impeded.
If a debtor is eligible to file under Chapter 13, then an attorney could help prepared and submit the repayment plan for the court’s approval. Filing puts at least a temporary halt to collection activities and creditor harassment.