Bankruptcy. It’s a scary word. To most people, it sounds like a financial death sentence.
But it’s actually not. Consider the fact that in 2016, almost 800,000 Americans filed for bankruptcy. The number one reason? Mounting medical bills, according to the Kaiser Family Foundation.
While bankruptcy is serious and does have a significant impact on your financial abilities, it’s not a monumental failure or a financial death sentence. Bankruptcy exists as a tool for people who find themselves in a financial situation that they just can’t fix.
Bankruptcy will not have a hold on your finances forever. In fact, it’s even possible to start rebuilding them right away.
How long will a bankruptcy stay on my credit report?
Anything on the public record (including bankruptcy) stays on your credit report for up to 10 years. However, in some cases, a bankruptcy can fall off your credit report in 7 years. This largely depends on the type of bankruptcy you declared. As a consumer, you will file either Chapter 7 bankruptcy or Chapter 13 bankruptcy.
Most consumers file for Chapter 7 bankruptcy over Chapter 13 bankruptcy. They assume that Chapter 7 bankruptcy is better, because it doesn’t require you to pay back your debts. Chapter 13 bankruptcy does require you to pay back some or all of your debts. So, Chapter 7 sounds better, right?
Well, not necessarily. Firstly, you need to qualify for Chapter 7 bankruptcy. You must be able to prove that you have no disposable income or liquidity and that your current monthly income is below your state’s median rate in order to file for Chapter 7 bankruptcy.
On top of that, it is easier to get Chapter 13 bankruptcy off of your credit report in 7 years than Chapter 7 bankruptcy. According to Equifax, Chapter 7 bankruptcy and non-discharged Chapter 13 bankruptcy remain on file for 10 years from the date filed. However, if a Chapter 13 bankruptcy is discharged, it remains on file for only 7 years from the date filed. Your bankruptcy is discharged once you’ve completed your payment plan and shown the courts that you’ve repaid your creditors the amount necessary.
In short: a bankruptcy will usually remain on your credit report for 10 years. However, with very quick repayment on a Chapter 13 bankruptcy, it is possible to have the bankruptcy come off of your report after only 7 years.
It’s worth noting that regardless of what type of bankruptcy you file, the accounts related to your bankruptcy will fall off of your credit report after 7 years. Furthermore, while bankruptcy can relieve you of the obligation to pay some debts, there are certain debts that cannot be legally discharged. These include child support, recent taxes, and student loans.
What can I do to improve my credit score with a bankruptcy?
In the meantime, remember that bankruptcy is not a financial death sentence. In fact, you don’t even have to wait 7-10 years to start rebuilding your credit.
While declaring bankruptcy will certainly make it difficult for you to access credit or reasonable interest rates for the next 7-10 years, the action itself doesn’t necessarily harm your score. In fact, it can help you out. Most people who file for bankruptcy already have pretty terrible credit scores. According to data from Equifax in 2010, those who filed for bankruptcy saw their scores increase, on average, about 80 points from right before they filed until after the proceedings had closed roughly 8 months later.
So, what can you do to help increase your score while you’ve still got that bankruptcy on your report? Here are a few tips:
- If you agreed upon a payment plan with courts, stick to it. There is nothing worse than messing up your payment plan after filing for bankruptcy.
- Never miss a payment! If you’re paying rent, insurance, or any other bills, make sure that you are always paying them on time. This is the easiest way to build your credit.
- Get a secured credit card. These are designed for people with no or very poor credit. They have very high interest rates and sometimes high annual fees, but they are the only way to rebuild credit when your credit score is very low. Don’t get excited and spend all of your newfound credit– in fact, you should never spend more than 30% of your credit limit, and always pay it off in full each month.
- Do not apply for more than one credit card at once. The more credit card applications you fill out, the more they will drag down your score. If you apply for a secured card and are denied, you should wait at least 6 months, if not a full year, before trying again. You can call a credit card company before applying and ask them what their policy is for approving applicants with bankruptcies on their credit report.
- Once you’ve been making on-time payments for a couple of years and your credit score is up to at least 650, consider applying for an auto loan. It will be difficult to find an auto loan with a reasonable interest rate, but it is possible, and it’s a great way to continue building your credit score. One factor in determining your credit score is whether or not you have a variety of credit. Having both a credit card and an auto loan mixes things up and helps you improve your score.
- Once you’ve had a secured credit card for a couple years and have been making regular payments and increasing your credit score, try applying for an unsecured credit card. Unsecured credit cards are generally a much better deal than secured credit cards, and this will help you build your credit even more. Do your research and make sure you find a credit card with a history of approving people in your credit score range.
Beware of credit repair services. You may find that after you file bankruptcy, you’ll start noticing ads everywhere from the radio to the internet, for services that can help you bring your credit score back up after a bankruptcy. Most of these places cannot accomplish what they claim, and many of them are outright scams.
In the end, the best way to recover is to do your research, learn about credit scores and how they’re calculated, and then manage your finances accordingly while avoiding common post-bankruptcy mistakes. Get some people in your life who can hold you accountable and track your credit score regularly.
You can recover from bankruptcy, but it will take hard work and great financial management. Consider these 7-10 years an opportunity to show creditors that you are capable of controlling your finances