It is a tough choice to file for bankruptcy. Still, it is sometimes essential to get your obligations forgiven and start over. While bankruptcy might help you get rid of your debts, it’s unusual that your credit score would be unaffected.
Your credit score will suffer whether you file for Chapter 13 bankruptcy or Chapter 7 bankruptcy. Even if you complete your payments on time and avoid collections accounts, maintaining your credit score throughout the bankruptcy process is challenging. Fortunately, after filing for bankruptcy, your credit score may be restored.
After you’ve finished the bankruptcy process, you’ll need to start again, and restoring your credit is a crucial first step. Although it may seem that this is an uphill struggle, there are actions you can take to repair your credit to the point where you may qualify for a credit card or a loan for a new vehicle or house.
It’s crucial to understand the various forms of bankruptcy before moving on to the actions that might help you improve your credit score.
Bankruptcy under Chapter 13 and Chapter 7
Individuals who petition for bankruptcy usually do so under Chapter 7 or Chapter 13 of the bankruptcy code. The grounds for filing, eligibility, and penalties are all significant distinctions between the two.
- Bankruptcy under Chapter 7
The more frequent of the two, Chapter 7 bankruptcy, is filed by persons who do not have enough income or assets to repay all or part of their debt. Because the debtor must liquidate their property to fulfill their payments and escape repossession, this sort of bankruptcy is known as liquidation bankruptcy. To qualify for Chapter 7, you must have a low disposable income that meets the means test, and the process may take up to three months. In addition, Chapter 7 carries a ten-year penalty and will reflect on your credit record.
- Bankruptcy under Chapter 13
Individuals who earn a lot of money but can’t pay off their obligations in full apply for Chapter 13 bankruptcy. In these circumstances, the debt is restructured, and the person is required to finish a court-ordered payment plan, which may take anywhere from three to five years. Debtors who file for Chapter 13 bankruptcy may retain their homes provided they pay their bills on time throughout the payback term. The seven-year penalty under Chapter 13 bankruptcy is less severe.
How Can you Repair Bad Credit Rating after Bankruptcy?
After filing for bankruptcy, it’s critical to rebuild your credit score to recover financial stability. Following these measures will assist you in rebuilding your credit once your bankruptcy obligations have been erased.
1. Keep track of how long the penalty will last.
The penalty period begins on the day you file for bankruptcy and continues until the penalty expires on your credit report. You cannot file for bankruptcy again for seven years after declaring bankruptcy. The Chapter 7 bankruptcy penalty will expire 10 years after the filing date. In contrast, the Chapter 13 bankruptcy penalty will expire 7 years after the filing date. As a result, if you filed for Chapter 13 bankruptcy and took you five years to finish the repayment plan and discharge your debts, you will still have two years before the penalty is no longer applicable.
2. Don’t get rid of your entire credit score.
Although it may seem the correct thing to do to remove items from your credit report included in a bankruptcy, this might damage your score. Your credit score considers the number of accounts, the kinds of funds, and the age of the accounts that show on your credit report. Removing old accounts from your credit report, even those “included in a bankruptcy,” can reduce the number of accounts on your report and decrease your credit history, lowering your credit score.
3. Examine your credit report for account statuses.
Following the completion of your bankruptcy, the status of your included accounts should be “included in bankruptcy” or “discharged,” with a balance of $0. Your statements must reflect this state since it’s far worse if they seem to be overdue or active with outstanding amounts. If any of the accounts listed in your bankruptcy are active, current, or due, make sure they have been rectified right away and display a $0 balance.
4. Do not apply for new credit regularly.
Make sure you space out your applications when asking for new credit lines following the bankruptcy. Too many applications in six months may hurt your credit score while making you seem desperate to lenders. You should only apply for a new line of credit every six months if you can handle the debt from your previous line of credit.
5. Make Non-Bankruptcy Account Payments to save your credit
Some of your accounts may be excluded if you file for bankruptcy. Certain debts, such as student loan debt, are not dischargeable in bankruptcy. You must continue to make payments on these accounts to boost your credit score. Even though these accounts aren’t included in your credit score, if you don’t pay them on time, you may have problems in the future.
6. Avoid changing jobs often.
While switching jobs will not affect your credit score, it may impair your ability to get a line of credit. When you apply for a new line of credit, lenders will look into your work history, and if you move employment often, they may be less inclined to accept you. Jumping between jobs might indicate a lack of discipline, but sticking with one work demonstrates responsibility and a steady income.
7. Keep an eye on your collection accounts
Collection accounts are following frequent bankruptcy, and they will show up on your credit record. These accounts will typically remain on your credit report for up to seven years after repayment. Still, you may work out a deal with the collector to get them removed after the payment is made. If you do come to an arrangement with a collector, make sure you obtain everything in writing so you can have it erased from your credit report if it still shows up after you pay.
8. Enlist the help of a co-signer
Having a co-signer may help you secure credit cards and loans that would otherwise be difficult to get. If you do utilize a co-signer, you must stay on top of your payments. Anything from a single late payment to default can harm the co-credit signer’s score as well as your own.
9. Make an application for a new credit card after bankruptcy
This is a tricky step to take after filing for bankruptcy, but it is necessary for repairing your credit. Credit card firms recognize that you cannot legitimately apply for bankruptcy for up to seven years, depending on your filing date. Thus, applicants who have just filed for bankruptcy are occasionally accepted. If you don’t qualify for a traditional credit card, you may be able to apply for a retail or gas credit card. Just keep in mind that the interest rates on these cards are higher.
If you cannot get a standard credit card or a retail card, a secured credit card may be an option. For the lender’s safety, some credit cards demand a down payment. The lender may change your secured credit card to an unsecured credit card if you pay off the debt on your secured credit card every month for at least one year.
Whether you acquire a regular credit card or a secured credit card, make sure your monthly amounts are manageable so you can pay them off in full each month. This will allow you to keep track of your debt and gradually improve your credit score. Late payments will show up on your credit record. They may stay there for up to seven years, lowering your credit score, mainly if your bankruptcy is still listed on your credit report.
Credit and Bankruptcy Lawyers Can Assist You
Bankruptcy may be a challenging and complicated process. It’s critical to file for the correct sort of bankruptcy. If you don’t understand all of your legal alternatives, you could not make the most significant selections. Berry K. Tucker & Associates, Ltd.’s bankruptcy lawyers have extensive expertise in bankruptcy processes. They can assist you in making the best choices possible while filing for bankruptcy. We can help you make sense of a complex process and develop a strategy to get you through bankruptcy and improve your credit score after that.