According to credit rating company FICO, it can take 10 years before a bankruptcy is expunged from your credit report. Bankruptcy not only denies you all but the worst credit arrangements (if any at all), it also can have negative effects on your employment prospects and ability to rent an apartment. This may sound bleak, but take heart: The relative effects of bankruptcy upon your credit score recede over time, well before 10 years elapse. This means you can rebuild your credit and get on with your life a lot sooner than 10 years, but it also means that you will rebuild the fastest if you adopt a disciplined program of damage repair. That's what we'll discuss in this guide to rebuilding after bankruptcy. We'll briefly review the two major types of personal bankruptcy, because they require somewhat different responses. Then we'll explore the steps you can take begin restoring your credit score and reestablishing your financial well-being.
What Is Bankruptcy?
You can file for bankruptcy in a federal court if you don't have enough money and credit to pay your bills on time. When you file, you begin an orderly, court-supervised process of dealing with your creditors. During the bankruptcy proceedings, you'll encounter certain obligations, including providing detailed financial information, meeting with your creditors and taking an approved credit counseling class. Your debt status upon successfully receiving a bankruptcy judgement depends on the type of filing:
- Chapter 7 Bankruptcy: This type of bankruptcy liquidates your debts. A court trustee sells your assets (except for certain protected ones) and distributes the proceeds to your creditors pro rata. Your debts are gone, but the effect on your credit history is harsh and long-lived, remaining on record for 10 years. Chapter 7 is only available to persons with little or no income and assets.
- Chapter 13 Bankruptcy: This is the more common form of bankruptcy, used to adjust the debts of those with regular income. It requires you to agree to a long-term repayment plan, overseen by a court trustee. The benefits of Chapter 13 are that you get to keep more of your assets, like your home, and that you can more quickly rebuild your credit standing. Chapter 13 bankruptcy remains on your credit history for 7 years.
How Do I Repair The Financial Damage?
When you enter into bankruptcy, your credit score will swoon, making it unlikely that you will qualify for any credit short of pawn shops and payday loans. Your subsequent behavior and actions will affect how quickly you can rebuild your credit score and regain access to the credit markets. If you are in Chapter 13 bankruptcy, the best thing you can do is to adhere to the court-sanctioned repayment plan. Normally, the plan calls for creditors to accept only partial repayment of your debts, with the remainder written off. You make a monthly payment to the court trustee, who distributes the money to your creditors as specified by the plan. Responsibly making your payments on time goes a long way towards mitigating the devastating financial aftermath of a bankruptcy.
What Immediate Action Should I Take?
During the bankruptcy process, you begin to regain control over your finances. This entails 2 major tasks:
- Fixing Errors: Just because you are in bankruptcy doesn't mean that you should relax your vigilant monitoring of your credit history. You can get your 3 credits reports, (from the 3 major credit bureaus, Equifax, TransUnion and Experian) via the federally authorized website. Carefully review and verify all entries. You have the right to dispute errors and to provide explanations – check with the credit bureau for the mechanism. Removing illegitimate entries from your credit history makes it easier and less costly to begin the recovery process.
- Creating And Abiding By A Realistic Budget: Your budget should provide a realistic assessment of your income and expenses, both non-discretionary (rent, food, utilities, court payments) or discretionary (entertainment, non-essential shopping). If, after eliminating discretionary spending, your income is inadequate for your expenses, you must either increase your income or reduce your expenses. This may cause some immediate pain, but it the only reliable way to pay off your debts and rebuild your life following bankruptcy. Consider moving to less costly housing, purchasing from resale stores, finding ways to extend your food budget, using food stamps and a host of other actions. Perhaps you can take on extra work or find a higher paying job. The most important requirements are that you vigilantly maintain discipline, avoid the use of credit and live within you means.
What Long-Term Action Should I Take?
Assuming you've successfully executed your budget and, if applicable, your repayment plan, for several months following your bankruptcy, you can begin taking additional steps to reestablish your financial reputation:
- Open a new checking account and savings account if you don't already have them. Compare the fees charged by different banks and credit unions for their most basic, inexpensive products. Your budget should include some amount of monthly savings, even if it's only $5. Consistency is key.
- Always pay your bills on time. If you can't and the reason isn't some emergency, it means your budget needs more work and that further spending cutbacks are needed.
- Once you've got $500 in your savings account, apply for a secured credit card. You might be eligible for a small credit line, say $200. that is secured by your bank accounts. Check GET.com for our recommended secured cards. Try to choose one in which the issuer reports your transactions to the credit bureaus, as this will help improve your credit score. Use the card every month, but always repay it in full by the billing date.
- As your financial situation improves, explore your opportunities for extending your access to credit. For example, you can apply for an FHA mortgage with a 3.5 percent interest rate as soon as 1 year after bankruptcy. Only do this if you are certain you can make the monthly mortgage payments. You can also apply for unsecured credit cards, charge cards and gas cards once your FICO score rises to a minimum threshold. As always, pay the full amounts each month and avoid all interest charges.
Life goes on after bankruptcy. Take advantage of your second chance to live a financially responsible life by maintaining control, making smart moves and remaining disciplined.
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