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How to Recover from Harsh Credit Penalties

Taking steps to reestablish your purchasing power.

Steps to take for better credit

The most common side effect you see from financial distress is usually a significant drop in your credit rating. Beyond the late payments and a few delinquent accounts, serious credit penalties for things like debt settlement, bankruptcy and foreclosure stay on your credit report for years, holding you back from reaching financial goals long after the hardship is over.

Fact: The harshest credit penalty for unpaid tax liens
remains on your credit report 15 years.

Although you cannot do anything to remove a credit penalty once it’s been applied to your credit report, you can take steps to improve your credit even before the penalty period is over. In this way, you can restore your credit to improve your financial outlook now instead of waiting around for penalties to expire.

Pop Quiz

Which type of bankruptcy stays on your credit report for 10 years?

a) Chapter 7

b) Chapter 11

c) Chapter 13

d) All of the above

Reveal Answer

The penalty for Chapter 7 bankruptcy remains on your credit report for 10 years from the date of discharge.

a) Chapter 7

Return to question

Identifying penalties on your credit report

So what is a credit report penalty? Easy – it’s anything negative that’s included in your credit file that could be driving your credit scores down.

Here are some common examples of penalties you may have incurred:

  • Bankruptcies
  • Foreclosure
  • Court judgments for back child support or unpaid alimony
  • Late payments in your credit history
  • Tax liens
  • Charge-offs
  • Settled debts
  • Credit limit overages

Make sure penalties are removed on time

Most of us just trust the financial institutions like your creditors and the credit bureaus are doing what they need to do and maintaining accurate information on your credit file.

But the sad truth is more often than not, your credit reports will contain some kind of error. Even more unfortunate, many of these errors will cost you points of your credit score.

Pop Quiz

How many credit reports contain an error that would decrease a consumer’s credit score?

a) One in three

b) One in four

c) One in ten

d) One in twenty

Reveal Answer

According to research, 25% of all credit reports contain a credit score damaging error.

b) One in four

Return to question

One of the most common mistakes on a credit report is an outdated penalty. This is where you incurred a legitimate penalty of some kind – for something like bankruptcy or unpaid taxes. However, after the penalty period expires, then penalty remains even though it should have be removed.

The benefit of disappearing penalties

In the U.S. credit industry, each credit penalty is given a certain limit on the time it can be applied to your credit report. Debt settlement, Chapter 13 bankruptcy and foreclosure each incur a 7-year credit penalty. A Chapter 7 bankruptcy credit penalty lasts ten (10) years.

However, the “weight” of these credit penalties and their impact on your rating decrease over time during the penalty period. A debt settlement penalty that occurred five years ago doesn’t have nearly the negative impact as a debt settlement penalty added yesterday. This is particularly true if you take steps to improve your credit after a penalty is applied to your credit report.

Balancing out credit penalties

If you’ve incurred one of these harsh credit penalties recently and need to rebuild your credit, take the following steps now:

  1. Request free copies of your credit reports from
  2. If you find things that you think may be mistakes, then use a credit correction service to have a professional get these errors removed on your behalf.
  3. Then start rebuilding your credit by reducing debt quickly and paying all your bills on time.
  4. Every positive move you make now will offset penalties incurred in the past.

Article last modified on August 23, 2017. Published by, LLC . Mobile users may also access the AMP Version: How to Recover from Harsh Credit Penalties - AMP.