Depending on your personality and outlook, bankruptcy can be unsettling, embarrassing or stressful. On top of dealing with creditors and courts, most people worry about how their credit score will be affected post-bankruptcy. After all, in today’s society, it can be difficult to rent an apartment, buy a car, or obtain a loan when credit scores are less than optimal. The good news is, with some strategic planning and diligence, the “fresh start” that bankruptcy offers is very real.
First: The Reality Post-Bankruptcy
A bankruptcy will cause a significant drop in your credit scores, and it will remain as an entry in your credit file for seven to ten years.
Chapter 7 bankruptcy is the most common form of personal bankruptcy. It eliminates much of your debt, but also has the greatest impact on credit scores. A Chapter 7 bankruptcy will appear on your credit report for 10 years.
Chapter 13 bankruptcy primarily restructures debt rather than eliminates it. A portion of the debt is paid off during a three-to-five-year payment plan, which is less damaging to your credit score. It also remains on your credit for only 7 years.
Not everyone qualifies for Chapter 7 or Chapter 13 – so be sure to read more about each of these options.
Recovery After Bankruptcy: Check Your Credit Reports
After your bankruptcy is completed, it is vital to check your credit to know exactly where you stand. You should review your credit reports for accuracy and dispute any entries that are incorrect, such as debts that were forgiven that still appear as negative entries.
If you filed Chapter 7 bankruptcy, you will be notified by the court informing you that the filing has been completed. Wait 90 to 120 days before checking your reports, as time is needed to ensure that all the bankruptcy information has been sent and updated. The three credit reports to check are Experian, Equifax, and TransUnion. Expert Tip: You are entitled to one free report per year from each of the three credit bureaus. Click here to learn more. You should review each report for accuracy and dispute any entries that may be incorrect.
If you filed Chapter 13 bankruptcy, the case won’t be considered discharged until the end of your repayment period. However, 90 to 120 days after your bankruptcy filing, be sure to request your credit reports to check your updated status. Remember, creditors are not obligated to report payments received during the Chapter 13 repayment period, but many do. Those who have filed Chapter 13 should check to ensure that their payments to any creditors excluded from the bankruptcy settlement are being recorded.
Once the repayment period is done, you’ll receive a notice that your case has been discharged. After 120 days, re-check all your credit reports to ensure that all debts settled under the repayment plan are closed and show zero balances.
Once your credit reports accurately reflect your situation, you can begin to rebuild.
Other Strategies to Thrive After Bankruptcy
- You may wish to work with a certified credit counselor to formulate a practical budget, establish realistic financial goals, and develop a long-term strategy for rebuilding your credit.
- Be wary of “credit repair services” that guarantee credit recovery in a short time frame. There are no shortcuts when recovering from bankruptcy – rebuilding your credit takes time and patience. But take heart – millions have succeeded, and so can you.
- Learn about the factors that go into calculating your credit score, and then consider these time-tested strategies to improve it:
- Credit-builder Loans: Your local credit union typically offers these loans, which are designed to help people build – or rebuild – credit. The borrowed amount is put into a savings account, where it earns interest but cannot be accessed until the loan is fully repaid. A fixed payment is made each month for a set period, after which the money (and typically most of the interest) is retained by you. For optimal benefit, request the longest-available repayment period. On-time payments are reported positively to the credit bureaus, raising your credit score.
- Secured Credit Cards: This type of credit card does not require conventional credit checks. Instead, you provide a cash deposit, which usually becomes your borrowing limit. If you do not pay your bills as promised, the lender can retain the deposit. If you use the card monthly and always fully pay off your balance, your credit score will be positively affected. After a year or two, you may begin to see credit card offers appearing in your mailbox. While this may be exciting, remember to be cautious, frugal, and responsible with any card you accept.
Make Your Payments! The most important thing you can do after bankruptcy is to make every one of your payments on time. This may mean cutting back your lifestyle for a period of time, but your improved financial stability is worth it. Consider every expenditure carefully, and make sure if you put anything on credit, you can pay it off by the end of the month.
Financial Freedom is Possible
It is essential to be patient post-bankruptcy. Recovery is within your reach, but it does take time and discipline. If you pay attention to your credit reports, find small ways to re-establish your credit, and make your payments, your credit scores will begin improving within a few years. By the time the bankruptcy is removed from your credit report, you should once again be eligible for credit programs and benefits.
Richard V. Ellis is a trusted Sarasota bankruptcy attorney with decades of experience helping his clients regain their financial footing and confidence.
