What is life like after bankruptcy? If you're thinking about filing for personal bankruptcy, it's important to look ahead and consider the potential consequences. Here is what you can expect if you decide to proceed.
Key Takeaways
- Individuals generally have two types of bankruptcy to choose from.
- In a Chapter 7 bankruptcy, most of your assets will be sold off to pay your creditors.
- In a Chapter 13 bankruptcy, you get to keep more of your assets but must repay your creditors in three to five years.
- Chapter 7 will remain on your credit report for up to 10 years, while Chapter 13 will remain for up to seven years.
- Having a bankruptcy on your credit report will make it more difficult to borrow money or obtain a credit card in the future.
- You can begin to rebuild your credit by consistently paying your bills on time.
What Happens When You File for Bankruptcy
For many different reasons, people sometimes find themselves at a point in life where there's no way they will ever be able to pay off all the debts they have accumulated. Filing for bankruptcy could be a logical next move.
But it isn't a step to be taken lightly. For individuals who declare bankruptcy, the process can be long and difficult and take years to recover from.
Individuals typically have two types of bankruptcy to choose from: Chapter 7 and Chapter 13.
Chapter 7, also known as a "liquidation" bankruptcy, is the more common form. You will be allowed to keep certain exempt assets, such as your furniture, car, and personal belongings up to a specified value, but any nonexempt assets, such as cash, real estate, and investments, must be turned over to your court-appointed bankruptcy trustee. In a Chapter 7 bankruptcy, the trustee uses the liquidated assets to pay off as much of your debt as possible, after which the rest of your debt is discharged.
Chapter 13, sometimes called a wage earner's plan, allows you to keep more of your assets, including saving your home from foreclosure. In return you must agree to a court-approved plan for repaying your creditors, typically over a period of three to five years. If you fail to adhere to the plan, you can be forced into Chapter 7, at which point your assets will be liquidated.
A Chapter 7 bankruptcy will remain on your credit report for up to 10 years, while a Chapter 13 will remain for seven years. Because of that, getting a loan of any kind will be extremely difficult for at least the next couple of years.
While it may be possible to improve your credit score and qualify for some types of loans after only a year or so, the lenders that will take you on will probably be from finance companies that charge exorbitant rates of interest. In some cases it may not be possible to get credit at all for major purchases, such as a car or home.
Check with a lawyer to ensure that you file the type of bankruptcy that best suits your financial position.
How to Recover After Filing for Bankruptcy
Here are a few steps that you can take to help regain control of your financial situation.
Maintain a Job and a Home
If you don't already have a job, it is important that you get one as soon as possible. Finding a good place to live, again if you don't have one already, ranks a close second. Stable employment and residential histories show creditors that you are reliable.
A growing number of landlords are checking credit references as a means of screening out possibly unreliable tenants. If you are not able to rent an apartment, you may have to room with a friend or relative until your credit improves.
Employers may also request credit scores and histories of their potential applicants as a measure of personal responsibility. A spell of bad luck can fuel a vicious cycle that may prevent you from getting a job that pays enough for you to pay off your debts. Do what you can to push forward anyway and find a job that can be the foundation of putting the bankruptcy behind you.
Pay Your Bills on Time
It is also imperative that you keep current on all of your monthly bills and other payments so that your post-bankruptcy credit record stays clean. There is no room for even the tiniest amount of backsliding in this regard. This means that you must be extremely watchful of every expenditure so that your expenses don't build beyond what you can afford to cover.
Your bill payment history is the single most important factor in determining your credit score.
Keep a Bank Balance
Opening and maintaining a checking and/or savings account is also important. Having a history of charged-off bank accounts could hinder your ability to open a new checking account.
The good news is that many banks offer second-chance programs for people in this situation. Keeping a positive balance in all accounts at all times will show employers and creditors that you now have a reliable cash flow.
Start to Rebuild Your Credit
During bankruptcy it's important to start to build up what got torn down. To rebuild your credit you may need to obtain a credit card. Using it wisely will demonstrate to lenders that you can manage your money and are determined to slowly rebuild your flawed credit history.
If you are unable to qualify for a regular credit card, consider a secured credit card. That's a special type of credit card where you're required to keep a certain amount of money on deposit with the issuing bank. After using a secured card responsibly for a period of time you may be able to graduate to a regular card.
If you find yourself racking up debt again, you should stop using your card immediately and start a repayment plan. If necessary, use cash or a debit card until you can pay off your credit card balance. Keep in mind that the interest rate on any card for which you are eligible will likely be higher than on the average credit card.
Find Help for Car Loans and Mortgages
When the time comes to buy something larger with debt, such as a car or house, you may need to have another party, such as a parent or other relative, cosign the loan.
Without this, you may not be able to obtain financing at all. With it, you may be able to get something resembling decent terms on your loan, depending on the credit score of the cosigner.
If you don't qualify for a car loan, you may simply have to wait until you can pay with cash. Another option might be a personal loan from relatives or friends.
Also an issue if you're buying a car: After declaring bankruptcy, you may find that insurance companies are reluctant or unwilling to insure you. If your past credit history puts you in what insurers consider a high risk pool, there are companies that will provide car insurance for you, charging more, of course.
How Many Types of Bankruptcy Are There?
There are six types of bankruptcy: Chapters 7, 9, 11, 12, 13, and 15. Chapters 7 and 13 are most commonly used by individuals, while Chapter 11 is primarily for businesses. The others are for more specialized purposes.
Do You Need a Lawyer to File for Bankruptcy?
Technically no, but the U.S. court system strongly recommends it "because bankruptcy has long-term financial and legal outcomes."
Can You Have Bankruptcy Removed From Your Credit Report?
Not unless it is on there by error. Otherwise, you will have to wait either seven or 10 years, depending in the type of bankruptcy, at which point it should fall off your credit reports automatically. Any person or company that claims it can get it removed before that is probably scamming you.
The Bottom Line
Bankruptcy is not the end of the world. In fact, Mark Twain, Walt Disney, Elton John, and Henry Ford all filed for bankruptcy at some point in their lives—and all went in to have prosperous futures. Using your post-bankruptcy income and credit wisely is the key to standing on your own two financial feet again. If you can prove to lenders and employers that your post-bankruptcy life is in order, then this obstacle, too, will pass.
