Rebuilding Credit After Bankruptcy
Created in collaboration with the credit experts at Experian
Sometimes debt can become overwhelming and unmanageable. The process of filing for bankruptcy is there to help those who truly cannot repay their debts. This chapter will answer these fundamental questions about bankruptcy:
- What is Bankruptcy?
- What is the difference between Chapter 7 and Chapter 13 bankruptcy?
- What is the bankruptcy timeline?
- What should I do before filing bankruptcy?
- How long does bankruptcy take?
- What happens after bankruptcy?
- How long does bankruptcy affect your credit?
- How can I qualify for credit after bankruptcy?
- How do I rebuild credit after bankruptcy?
What Is Bankruptcy?
Bankruptcy is a legal process that provides financial protection and debt relief through the courts. It is intended for people who have no other options to repay their debts. When you file for bankruptcy, a judge will determine whether you meet the criteria to be legally released from your obligation to repay your debts.
In this section, we will discuss the two most common types of bankruptcy, including how long the process takes and the affect each one will have on your credit.
What Is the Difference between Chapter 7 and Chapter 13 Bankruptcy?
There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.
- You Do Not Repay Debt
- Affects Longterm Credit
- Pay Higher Interest Rates for a Longer Period
- Pay Back a Portion of Debt
- Qualify for Credit Quickly
- Restore Credit Faster
In a Chapter 7 bankruptcy, you do not repay any of the debt you owe. Under Chapter 13 bankruptcy, you are responsible for paying back a portion of the debts that you owe through a debt repayment plan.
There are advantages and disadvantages to each type of bankruptcy.
Because you repay a portion of the debt under Chapter 13, you can usually qualify for new credit more quickly. It is also deleted from your credit report sooner, helping restore your credit faster.
Chapter 7 bankruptcy eliminates your responsibility to repay any debt you owe. However, it remains longer in your credit report, and will affect your credit scores for the entire time it appears in your credit report. Because you don’t repay any of the debt, it also will prevent you from qualifying for new credit or cause you to pay higher interest rates or fees for a longer period of time.
If you are faced with bankruptcy, get advice from a qualified bankruptcy attorney. An attorney can help you identify which is the right chapter for you. You can learn more about bankruptcy court and how to find a bankruptcy attorney at: http://www.uscourts.gov/services-forms/bankruptcy.
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What Is the Bankruptcy Timeline?
The overall timeline for your bankruptcy depends largely on the chapter filed. There are certain steps that will take place with every bankruptcy, and your bankruptcy attorney will provide you with details on how long each step will take. The following are the common steps that apply to both a Chapter 7 and a Chapter 13 bankruptcy:
Petition is Filed
The petition for bankruptcy is filed with the court. An automatic stay preventing creditors from trying to collect goes into effect once they are notified of the filing.
Documents to Bankruptcy Trustees
Once filed, you or your attorney will need to provide certain documents to the Bankruptcy Trustee, including but not limited to pay stubs, tax returns, and bank statements.
Meeting of Creditors
A meeting of creditors will take place, where they will be able to ask questions and review the information and filing documents.
No Distribution or Proof-of-Claim is Filed
Depending on if there are assets to be liquidated, the Trustee will either file a notice of no distribution or file a notice to file proof-of-claim.
Repayment Plan Approved
If filing under Chapter 13, your repayment plan must be approved by the court. Your creditors will submit claims for the amounts to be repaid, and you will begin making payments according to your plan.
Financial Education Course Completed
You must complete a financial education course and file the certificate of completion.
Once the terms and requirements are completed, the bankruptcy will be discharged. In a Chapter 13 bankruptcy, this happens only after the repayment plan is complete.
What Should I Do before Filing Bankruptcy?
Before deciding whether to file bankruptcy, it may be helpful to order copies of your credit report from each of the three national credit reporting agencies. Use your reports to make a list of all the debts you owe.
You can get a free credit report from each of the credit reporting agencies once every 12 months at www.annualcreditreport.com.
Seek advice from a qualified credit counselor or financial advisor, as well. By consulting with an expert, you may find you have other options. Through careful budgeting you may be able to repay the debts you owe over time. Debt consolidation or debt settlement may be viable options, too.
How Long Does Bankruptcy Take?
Because there is no repayment plan, Chapter 7 bankruptcies are normally discharged around three months after they were filed. “Discharged” means the court’s requirements for completing the bankruptcy are fulfilled.
Since Chapter 13 bankruptcies have debt repayment plans that can take several years to be completed, they take longer to be discharged. Most Chapter 13 repayment plans take anywhere from three to five years to be completed.
What Happens after Bankruptcy?
Bankruptcy may help you get relief from your debt, but it’s important to understand that declaring bankruptcy has a serious, long-term effect on your credit.
Bankruptcy will remain on your credit report for seven to 10 years. It can affect your ability to open credit card accounts and to get approved for loans with favorable rates as long as it is part of your credit report.
How Long Does Bankruptcy affect Your Credit?
A Chapter 7 bankruptcy remains on your credit report for 10 years from the date it is filed.
Chapter 13 bankruptcies are removed seven years from the date they are filed.
Bankruptcy represents the highest level of risk for lenders. As long as the bankruptcy appears on your credit report, it will affect your ability to obtain credit.
In addition to affecting your ability to qualify for new credit, bankruptcy can also prevent you from getting things like a cell phone or an apartment. It could cause you to pay higher security deposits for utility service, like electricity or natural gas. Bankruptcy could possibly affect your ability to get a promotion or qualify for a new job at another company. Even your car insurance rates could go up.
How Do I Qualify for Credit after Bankruptcy?
There is a common myth that once your bankruptcy has been discharged, your credit report is wiped clean and you can begin applying for credit again immediately. In fact, it can take years to rebuild your credit history.
Err on the Side of Caution When Opening New Accounts
If your bankruptcy was discharged recently, you may have to wait a while before you can qualify for a new credit card. Even if you can qualify, it won’t be the kind of credit you should want. The credit you will be offered will likely have very high interest rates, additional fees, or both.
Even if you are in a better financial position, high interest credit cards can lead to growing debt if you don’t manage them carefully.
Be sure to work with a trustworthy lender, like Montgomery Ward, to ensure you receive fair rates. Also, be sure the account is reported to the national credit reporting companies. If the account is not reported, it won’t help you rebuild your credit.
When you do open an account, use it carefully. Plan ahead to cover things like annual fees. You must make your monthly payments on time every time.
The key to rebuilding credit is to have an open, active account with a history of on-time payments.
Buying a House
While you may be able to get a mortgage loan after declaring bankruptcy, it almost certainly will be with higher interest rates and fees. In order to qualify, you probably will need to demonstrate good payment history for several months, or maybe several years, on other accounts before you apply.If you are on solid ground financially and you have established a positive credit history since declaring bankruptcy, work with your lender to pre-qualify for a home loan. Doing so will not only give you an idea of how much house you will be able to afford, it will also allow you to see what kind of interest rate you will be offered. If, after you pre-qualify, you are not satisfied with the terms that are available to you, you can always choose to wait a while longer, continue building a stronger credit history and save more for a down payment.
Buying a Car
If your bankruptcy was recent, you might not be able to qualify for a car loan. If you do qualify, you may find that the interest rates and terms that are offered are quite high. If you are planning to purchase a car, you will need to begin re-establishing a positive payment history beforehand. With a bankruptcy in your credit report it could take months before you can get a loan and perhaps years before you can qualify for the best interest rates again.
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How Do I Rebuild Credit after Bankruptcy?
Sometimes, a person may choose to reaffirm, or keep, one or more of their credit accounts, such as a home or car loan, and continue to make payments on the account after filing bankruptcy.
Continuing to use the account and make all payments on time can be very beneficial for rebuilding your credit history after the bankruptcy has been discharged.
However, you may not be able to keep any of your accounts. That will be determined by the bankruptcy court and your creditors.
Tips for Reestablishing Your Credit
Apply For Credit with Your Bank
Open a Secure Account
Charge Small and Pay Off Quickly
Verify Lender Reports to Bureaus
Get Added to a Joint Account
Know Your Joint Account Risks
If you are beginning with no open, positive accounts after bankruptcy, you will need to start small and slowly reestablish your credit over time. To do this, you can:
- Apply for a Credit Card with Your Bank or Credit Union. They may be willing to work with you if you have an existing relationship.
- Open a Secured Credit Card. A secured credit card is linked to a savings account. Your limit is typically a percentage of your savings account balance. Charge small purchases on the card and pay the balance right away in order to demonstrate your ability to manage the card. If all payments are made on time, the lender may convert the secured card into a traditional credit card. Be sure the lender you choose reports its accounts to the national credit reporting companies. If they do not report secured accounts, ask if they will report the account after it is converted to a standard credit card account.
- Ask a family member or close friend to add you to one of their accounts as an authorized user or joint account holder. Keep in mind that as a joint account holder:
- You are equally responsible for any charges made on the account, even if you are not the one who made them. Any late payments made on the account will affect both your credit history and the credit history of anyone else listed on the account. If the account has a high balance, it can affect your credit scores, even if you haven’t used the card.
- If you are added as authorized user only, you won’t be responsible for making payments on the account, but many credit card companies will still report the account on your credit reports as well. As long as all payments are made on time, it can help you build your credit history.
- Apply for a Montgomery Ward Credit Account. Using your account responsibly will help you rebuild a positive credit history over time.
As time passes and you demonstrate good credit management on your new accounts, lenders will become more willing to work with you. Eventually you will find it easier to qualify for new credit.
Up Next: Chapter 5
How to Prevent Identity Theft & Repair Credit
Complete List of Chapters
How to Rebuild Credit After Bankruptcy