Ask Stacy: Do I Have to Admit to a Bankruptcy?

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Do not judge me by my successes, judge me by how many times I fell down and got back up again.
– Nelson Mandela

James is ready to move on after completing a Chapter 13 bankruptcy, and wonders when his slate will be clean…

I filed chapter 13 and was released in 2006, do I still have to admit I filed bankruptcy after it no longer shows on my credit report?
– James

Most dings to your credit history remain visible for seven years. Many people believe that all bankruptcies stay on your credit report for 10 years. Not true – for Chapter 7 bankruptcies, the 10-year number is correct. But a Chapter 13 only remains on your report for seven.

James is right to be concerned about getting this negative off his credit history. As you might expect, a bankruptcy is one of the worst things that can happen to a credit score.

Check out the following video for how some money mistakes will impact your credit score, then read on for more…

To recap those I mentioned in the video:

  • Maxed-out card: 10-45 points
  • 30-day late: 60-110 points
  • Debt settlement: 45-125 points
  • Foreclosure: 85-160 points
  • Bankruptcy: 130-240 points

The higher end of the ranges above would generally apply to those with the highest scores and the lower end to those with lower scores. Keep in mind that a perfect FICO credit score is 850, and to get the best possible deals, depending on the lender, you’ll need 730 to 760.

Translating point losses into dollar losses

A bad score means less access to credit and higher interest rates if you get it. Less access to credit means lost opportunity – higher rates will cost you a ton of money.

Consider the mother of all debt: a mortgage. Let’s say you’re borrowing 200 grand on a 30-year fixed mortgage at today’s average rates. Show up at the lender’s office with a 620 to 639 credit score and you’ll pay 4.8 percent. If you make minimum payments, your total interest bill for that mortgage will amount to about $178,000 over 30 years. But if you waltz in with a 760 score, you’ll only pay 3.22 percent and your total interest bill over the life of the loan declines to about $112,000.

That means over the life of the loan, a lousy score cost $66,000 – enough to finance your own business, put kids through college, or retire a year earlier.

(By the way, the information above came from credit score creator Fair Isaac’s calculator. Check it out for yourself.)

Now let’s get back to James’ question: When can he stop admitting to a bankruptcy?

As I said above, a Chapter 13 bankruptcy can appear on a credit history for seven years. We know that James’ bankruptcy was discharged in 2006. That’s when he completed his court-approved repayment plan. What he doesn’t say, however, is the date the bankruptcy was filed – that’s when the seven-year clock started ticking. Since repayment plans typically take three to five years, James probably filed more than seven years ago and is in the clear now.

But I think what James is really asking is when he can literally stop confessing he went bankrupt. The answer to that question depends on who he’s talking to. If he’s talking to the guy sitting next to him on the bus, he doesn’t have to admit it at all. If he’s giving a sworn deposition or applying for a job or loan, however, he should admit it forever. The reason is simple: It’s the truth.

That being said, after a bankruptcy disappears from his credit history, there should be no way for anyone to find out. So if a court, government agency, employer, or lender doesn’t ask that specific question, there’s no reason to volunteer the information. But if they do, be honest.

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