Filing for bankruptcy can be both terrifying and liberating. Many people fear that negative information reported to the three credit bureaus will outweigh the immediate benefits of debt relief. Although bankruptcies may appear for up to 10 years on your credit report, it is possible to make significant steps to rebuild your credit in the meantime. In fact, filing for bankruptcy is often an excellent way to rebuild credit after facing extreme debt. Filing for bankruptcy requires counseling and education about making good financial decisions – education you may not have received in the past. It also gives you a clean state with which you can establish a history of good financial decisions.
There are two common types of bankruptcy that may make sense for you and your debt relief. Each type of bankruptcy filing has a different period it remains on your credit score. Despite the time involved, it is possible to rebuild your credit while a bankruptcy appears on your credit history.
Chapter 7 bankruptcy
A Chapter 7 bankruptcy allows you to discharge many types of debts without repayment of the debt. It is often considered a “financial reset” by allowing filers to escape a cycle of increasing debt due to increasing interest rates on late payments. It will also freeze collection efforts from creditors, who cannot pursue legal action during the automatic bankruptcy hold. This is often a relief to debtors, who feel that creditors are increasingly relentless in their pursuit of errant debtors.
This type of bankruptcy is reported for 10 years on your credit score. At the end of 10 years, the debt is automatically removed from your credit score.
Chapter 7 is the most common type of bankruptcy filing due to the lower costs involved. However, your creditors may have the right to receive compensation in the form of certain assets, such as your home, stocks, retirement plans, and vehicles. A qualified bankruptcy attorney will be able to discuss which of your assets, accounts, and properties will be considered exempt in a Chapter 7 bankruptcy filing.
Chapter 13 bankruptcy
A Chapter 13 bankruptcy manages debts differently. Whereas in Chapter 7 filings, debts are discharged with no repayment, a Chapter 13 filer will repay some of the debt, up to 100% of the amount owed. This payment plan typically lasts between 3 and 5 years. Chapter 13 will remain on your credit score for 7 years from the filing date. After the 7 years pass, the bankruptcy is automatically removed from your credit score.
Chapter 13 filings are not as common as Chapter 7, because they are more expensive and require payments for several years to creditors. However, because of the repayments made by the debtor, lenders often look more favorably on Chapter 13 filers. In addition, a Chapter 13 filing may be more advantageous in certain situations, depending on the property and vehicles you own and the amounts owed to them.
Speak with an experienced bankruptcy attorney to determine if making a Chapter 13 bankruptcy filing is the right option for you.
Rebuilding your credit after bankruptcy
Many factors go into how a bankruptcy will reflect on your credit score, including your current score and your financial situation as a whole. The largest hit will likely come immediately after submitting the filing, but it is possible to rebuild your credit in the ensuing months and years.
Before the bankruptcy is removed from your credit score, you can take steps to reestablish your credit history by:
- Avoiding late payments for bills and utilities in order to establish a solid payment history
- Obtaining a secured credit card or loan
- Maintaining a high percentage of available credit lines
Regardless of other steps, you take to rebuild your credit, the most important thing to do is continue to monitor your credit score. While this may be embarrassing, especially after the immediate hit when the bankruptcy filing is reported to credit agencies, many people report an increase in their scores as soon as several months after filing.
Additionally, if any incorrect information appears on your credit report, you should file a dispute with the reporting agency. If information about your bankruptcy, or the accounts included in the filing, is incorrect, you can ask for the information to be removed altogether. You should also know that certain types of debt, such as student loans, child support, and money owed to the IRS may not be dischargeable in a bankruptcy filing. Payments of these debts will reflect on your credit score during the pendency of the bankruptcy filing.
This article does not contain legal advice and is for informational purposes only. In order to speak with a qualified bankruptcy attorney, contact the Law Office of Jeffrey B. Kelly online or call us at 770-809-3099 to discuss your options for moving forward and getting out of debt.