If you want to have a healthy credit score and report, you likely already know that it’s important to avoid declaring bankruptcy at all costs. While it’s true that a bankruptcy can have a serious effect on your credit score, declaring bankruptcy is sometimes necessary.
We’ll take a closer look at the different types of bankruptcy and cover how long employers, credit card companies and banks will be able to see that you’ve declared bankruptcy. Finally, we’ll give you a few more tips on how you can start rebuilding your credit after a bankruptcy.
What is Bankruptcy?
Bankruptcy is a legal term for a federal court procedure that gives consumers and businesses a chance to restructure property and/or clear certain types of debt. You may be able to discharge some or all debts if you can prove that paying back your debts would cause you undue hardship.
This means that after a court approves your bankruptcy and you complete all ordered steps, you won’t need to pay back debt or interest you’ve accrued. Some of the most common types of debts discharged during bankruptcy include:
- Credit card debt
- Medical debt
- Lawsuit judgments made against you
- Personal loans
- Promissory notes
- Most debts arising from a car accident
People who declare bankruptcy often say that they feel like they’re working with a clean slate when it comes to debt. However, this doesn’t mean that you should see bankruptcy as a “get out of debt free” card. First, you’ll need to convince a judge that bankruptcy is the only viable option for you. Then, you’ll need to take some additional steps depending on the type of bankruptcy you declare.
The most common types of bankruptcy are Chapter 7 and Chapter 13, though there are many other types of bankruptcy. Let’s look a little closer at the differences between them.
Under a Chapter 7 bankruptcy, you must sell any assets you have to pay off your debt. After you’ve paid down what you can, the court will forgive or discharge the remainder of your debt. Though some personal properties are exempt from a bankruptcy, you’ll need to sell assets like cars and homes to finish the proceedings.
Chapter 7 bankruptcies are sometimes called “liquidation bankruptcies” because they require you to liquidate (sell) your assets. Chapter 7 bankruptcies are usually used by people who have low to no income. You must pass a “bankruptcy means” test before a court will allow you to liquidate your assets. Businesses can also apply for Chapter 7 bankruptcy and must also follow the liquidation process.
Chapter 13 bankruptcies, sometimes called “reorganization bankruptcies,” are a type of bankruptcy that allows you to keep your property. Under a Chapter 13 bankruptcy, you work with creditors and banks to create a repayment plan.
Most repayment plans last between three and five years and allow you to pay a partial amount of your debts to all of your creditors. At the end of your repayment period, a court will wipe away any valid remaining debts under your name. Unlike Chapter 7 Bankruptcy, only individual private citizens and sole proprietors may file for Chapter 13 bankruptcy.
You also have to meet three specific criteria:
- You have to have some form of regular income.
- Your total unsecured debt cannot be more than $394,725. Unsecured debts are debts that don’t have collateral (anything your debtor can “take” if you don’t pay your bills). Credit card debt and medical debt are examples of unsecured debt.
- Your total secured debt cannot be more than $1,184,200. A secured debt is a type of debt that’s tied to collateral. Auto loans and mortgages are examples of secured debt.
If you don’t meet these criteria, you can’t file for Chapter 13 bankruptcy. If you aren’t sure whether you qualify, contact a licensed bankruptcy attorney in your area and request a consultation.
If you haven’t already begun the bankruptcy process, it’s important to remember that bankruptcy can’t clear all debts. Debts that usually aren’t dischargeable during both Chapter 7 and Chapter 13 bankruptcies include:
- Student loan debt
- Court-ordered debts like unpaid child support or alimony
- Back taxes
- Debts arising from an accident in which you were driving under the influence
- Fines, penalties and any other court costs associated with you breaking the law
Carefully consider other options before you decide to declare bankruptcy. Any type of bankruptcy has a harmful effect on your credit and will make getting a future loan very difficult.
How Long Does Bankruptcy Stay on Your Credit Report?
If you do decide that you have no other option than to declare bankruptcy, don’t despair. Bankruptcy will do serious damage to your credit, but it isn’t permanent. Chapter 7 bankruptcies stay on your credit report for 10 years and Chapter 13 bankruptcies stick around for seven years.
During the years that your bankruptcy is on your credit report, you may see a score that’s much lower than what you’re used to. The best thing that you can do during this period is to work on maintaining positive credit building habits.
How to Get a Bankruptcy Off Your Credit Report
Under the Fair Credit Reporting Act, credit bureaus are legally required to remove expired bankruptcies automatically. In theory, you don’t need to do anything to get your bankruptcy taken off your credit reports after those seven to 10 years have passed. However, the truth is that failing to remove bankruptcies is one of the most common violations of the Fair Credit Reporting Act. Even after your bankruptcy has expired, you may still see the judgment as active.
If this happens to you, you’ll need to dispute the bankruptcy with the credit reporting agency. Each of the three credit reporting bureaus — Experian, Equifax and TransUnion — are required to investigate any disputes you make. First, get all three of your credit reports. You can get a free copy of each of your credit reports once every 12 months.
Check and make sure that the bankruptcy isn’t still on each of your reports. If it is, file a dispute with each reporting agency that still lists the bankruptcy. You’ll need to contact each bureau independently to have it totally removed from all reports. Keep copies of any court papers you receive on file so you can prove that the appropriate amount of time has passed if you need to.
Tips to Rebuilding Credit After a Bankruptcy
You’ve made the decision, contacted a lawyer and followed all the proper steps. Next comes one of the most difficult parts of bankruptcy — moving on. Thankfully, there are a number of steps that you can take to begin repairing your credit as soon as you see the bankruptcy on your report. Here’s how to get started.
Make Your Payments On Time, Every Time
Your creditors will give you due dates for when you need to make your payments if you’re going through a Chapter 13 bankruptcy. In addition, if you have non-dischargeable debts hanging around after bankruptcy (like a student loan) you also have due dates. Between 35% and 40% of your credit score comes from your payment history.
This means that the single best way to raise your score after a bankruptcy is to keep up with your payments. Write down each of your payment due dates in your calendar or put an alarm on your cell phone. This can stop you from accidentally falling further behind on your debts.
Apply For a Secured Credit Card
If credit card debt caused your bankruptcy, you might be cautious about applying for another card. But a secured credit card can help you build credit safely. A secured credit card is a type of card that’s backed by cash collateral.
When you open a secured card, you give the credit card company a deposit. The credit card company then extends you a line of credit equal to that deposit. For example, if you put down $500, the credit card company would give you a card with a limit of $500. You then make recurring monthly payments on the card, just like an unsecured card. If you decide to close the card, your credit card company refunds your deposit.
Secured cards remove the risk lenders take when they extend you credit, so you can get a card without a perfect score. Credit card companies also report secured card payments to credit reporting bureaus, which means they improve your score over time. Remember that you still need to make on-time payments if you want to see increases. If you fail to make your payments on time, your score will suffer even more.
Use a Credit Monitoring Services
As you work to build up your credit score after a bankruptcy, you don’t want any surprises. Credit monitoring services keep an eye on your credit report and allow you to catch instances of fraud and identity theft before they can harm your credit.
MoneyLion members get access to credit tracking services that help keep their scores secure, including 24/7 fraud protection. You can also view your score through the MoneyLion app and see how your credit has improved over time.
Avoid Closing Your Credit Lines
Your first instinct might be to close your credit lines. However, closing existing credit lines raises your overall credit utilization rate, which lowers your score. If you want to stop relying on credit cards, leave your card someplace where it’s not easily accessible, such as in a locked safe or with a trusted family member.
Reclaiming Your Finances After Bankruptcy
Though recovering from a bankruptcy can be a challenge, the truth is that you can come back — and your finances can be stronger than ever. You’ll set yourself up for a great credit profile when your bankruptcy is finally removed as long as you create a credit improvement plan and stick with it. Credit Builder Plus is a credit-building program from MoneyLion with a 5.99% APR credit builder loan that you may want to check out.
Do you need help getting your credit back on track after a bankruptcy? MoneyLion can help. Download the MoneyLion app from the Google Play or Apple App store today to take advantage of all the credit building tools and services that MoneyLion offers.