Filing for bankruptcy is a difficult decision to make, but it is sometimes necessary to have your debts forgiven and start over. While filing for bankruptcy can erase your debts, your credit score will rarely make it through bankruptcy unscathed.
Whether you file for Chapter 13 or Chapter 7 bankruptcy, your credit score is going to take a hit. It is difficult to maintain your credit score through the bankruptcy process, even if you make your payments and avoid collections accounts. Fortunately, it is possible to restore your credit score after filing for bankruptcy.
Once the bankruptcy process has been completed, you will need to start over and rebuilding your credit is an important first step. This may seem like an uphill battle, but there are steps you can take to rebuild your credit to a respectable level so that you can qualify for a credit card or a loan for a new car or home.
Before getting into the steps that can help you rebuild your credit score, it is important to understand the different types of bankruptcy.
Chapter 13 and Chapter 7 Bankruptcy
When individuals file for bankruptcy, they will generally file for Chapter 7 or Chapter 13 bankruptcy. There are major differences between the two including the reasons to file, eligibility, and penalties.
Chapter 7 Bankruptcy
Chapter 7 bankruptcy is the more common of the two as people who file for Chapter 7 generally do not have the income or the means to repay all or some of their debt. This type of bankruptcy is known as liquidation bankruptcy because the debtor must sell their property to make their payments and avoid repossession. To be eligible to file for Chapter 7, you must have a low disposable income that passes the means test and it can take 3-5 months to receive a discharge. Chapter 7 also carries a ten-year penalty in which it will appear on your credit report.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is filed by individuals who have substantial income but cannot repay their debts in full. In these cases, the debt is reorganized and the individual is expected to complete a court mandated payment plan that can take 3-5 years. Debtors who file Chapter 13 can keep their property if they catch up on their payments during the repayment period. Chapter 13 bankruptcy carries a less harsh seven-year penalty.
How to Build Credit After Bankruptcy
Building your credit score after filing for bankruptcy is important for regaining your financial stability. The following steps will help you rebuild your credit after the debts included in your bankruptcy have been discharged.
1. Keep Track of the Penalty Duration
The penalty duration starts on the date that you file for bankruptcy and will remain on your credit report until the penalty expires. Once you declare bankruptcy, by law, you cannot file for bankruptcy again for seven years. The penalty for Chapter 7 bankruptcy will end 10 years after the file date and the Chapter 13 penalty will end 7 years after filing. Therefore, if you filed for Chapter 13 bankruptcy and took 5 years to complete the repayment plan and discharge your debts, you will have two more years left until the penalty ends.
2. Check Account Statuses on your Credit Report
After completing your bankruptcy, the statuses of your accounts included in the bankruptcy should say “included in bankruptcy” or “discharged” and have a balance of $0. It is important for your accounts to show this status because it is worse for these accounts to show that they are delinquent or active with outstanding balances. If your accounts included in your bankruptcy are shown as active, current, or delinquent, make sure this is corrected immediately and that these accounts show a $0 balance.
3. Make Payments on Non-Bankruptcy Accounts
When you file for bankruptcy, some of your accounts may be excluded. Certain debts like student loan debt cannot be included in a bankruptcy discharge. It is very important for you to keep making payments on these accounts to improve your credit score. Even if these accounts are not included on your credit score, you could experience trouble in the future if you do not keep up on the payments.
4. Watch your Collection Accounts
It is common for collections accounts to appear on your credit report after filing for bankruptcy. Generally, these accounts will appear on your credit report for up to seven years after repayment, but you can make an agreement with the collector to remove these accounts upon completion of the payment. If you do make such an agreement with a collector, make sure you get the agreement in writing so you can have it removed from your credit score if it still appears after you complete your payment.
5. Apply for a New Credit Card
This step is usually difficult after filing for bankruptcy, but it is crucial to restoring your credit. Applicants who have recently filed for bankruptcy are sometimes approved because credit card companies understand that you cannot lawfully file for bankruptcy for up to seven years, depending on your file date. If you are not able to qualify for a typical credit card, you may qualify for retail or gas credit cards. Just be aware that these cards carry higher interest rates.
If you cannot get a traditional credit card or retail card, you should consider a secured credit card. These credit cards require a down payment for the protection of the lender. If you pay off the balance of your secured credit card every month for at least one year, the lender may convert this card to an unsecured credit card.
Whether you get a traditional credit card or secured credit card, make sure you keep your monthly balances reasonable so you can pay them each month in full. This will help you control the interest and slowly rebuild your credit score. Late payments will appear on your credit report and may remain there for up to seven years which can negatively impact your credit rating, especially if your bankruptcy still appears on your credit report.
6. Use a Co-Signer
Using a co-signer will help you qualify for credit cards and loans that may otherwise be difficult to get. If you do use a co-signer, keeping up with the payments is extremely important. Anything from one late payment to a default will negatively affect the co-signer’s credit score in addition to yours.
7. Do Not Frequently Change Jobs
While jumping from job to job will not affect your credit score, it can still impact your ability to apply for a line of credit. Lenders will research your job history when you apply for a new line of credit and they may be less likely to approve if you change jobs too often. Sticking with one job will show that you are responsible and have a stable income while jumping between jobs can suggest a lack of discipline.
8. Do Not Frequently Apply for New Credit
When applying for new lines of credit after bankruptcy, make sure you spread out your applications. Too many applications within a six-month period will not only negatively impact your credit score, but also make you seem desperate to lenders. You should apply for one line of credit every six months and only apply for another line of credit if you can manage the debt from the first line of credit.
9. Do Not Remove Everything from your Credit Score
Removing accounts from your credit report that were included in bankruptcy may seem like the right thing to do, but this may lower your score. The number of accounts, types of accounts, and age of the accounts that appear on your credit score are all factored into your credit score. Removing old accounts from your credit report, even those “included in bankruptcy,” will lower the number of accounts on your report and shorten your credit history which can lower your credit score.
Get Help from Bankruptcy Attorneys
Filing for bankruptcy is often a difficult, complex process. It is important to file for the right type of bankruptcy and if you are not aware of all your legal options, you may not make the best decisions. The bankruptcy attorneys of Berry K. Tucker & Associates, Ltd. are experienced in bankruptcy proceedings and will help you make the best decisions when filing for bankruptcy. We can help make sense of a complicated process and create a plan that will get you through the bankruptcy and rebuild your credit score in the aftermath.
Contact Us
Give Berry K. Tucker & Associates, Ltd. a call at (708) 425-9530 to speak with a qualified bankruptcy attorney in the Oak Lawn, IL area. We provide free consultations.
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