Although filing for bankruptcy may get you out of some debts, it will remain on your credit report for 10 years. You can help the process by offsetting the negative information on your credit report with something more positive.
Bankruptcy is a legal process through which people or other entities who cannot repay debts to creditors may seek relief from some or all of their debts. In most jurisdictions, bankruptcy is imposed by court order, often initiated by the debtor.
If the court decides that you can declare bankruptcy, it will also decide what debt is dismissed and may still require you to pay back some of your debt.
Declaring bankruptcy will negatively impact your credit history and make getting loans and new credit cards difficult. You may not qualify or be required to accept a higher rate.
When is bankruptcy a good idea?
Bankruptcy will not only relieve you of certain debt, but the court will usually assign you a budget, so you can repay your remaining debt. It will stop foreclosures of homes, repossessions of cars and other property, cease wage garnishments and prevent your utilities from being turned off.
Even though every case is different, bankruptcy can reduce or dismiss common debt from credit cards, medical bills, past-due utility bills and even rent. Other debts, such as child support and alimony, student loans and owed taxes are never, or rarely, dismissed by bankruptcy,
What are the types of bankruptcy?
In fact, there are six different types of bankruptcies:
•Chapter 7: Liquidation.
•Chapter 13: Repayment Plan.
•Chapter 11: Large Reorganization.
•Chapter 12: Family Farmers.
•Chapter 15: Used in Foreign Cases.
•Chapter 9: Municipalities.
While businesses usually file Chapter 11, for individuals, the most common types of bankruptcy are Chapter 7 and Chapter 13. Each has its advantages, and your personal situation will define which may be the best for you.
In Chapter 7, the court sells your property and assets to pay back your debt. Any debt left over will be dismissed. Some property is excluded, but you could lose your car and home. This bankruptcy will stay on your credit report for 10 years.
In Chapter 13, you will work with the court to repay a part or all of your debts. In this bankruptcy, you can retain your possessions and assets and not have them sold or repossessed. Repayment plans can last from three to five years and the bankruptcy will be on your credit history for only seven years.
Improving your credit after bankruptcy
One of the biggest consequences of declaring bankruptcy is the impact on your credit. Not only will the filing impact your credit, but any loans or credit card debt settled by the bankruptcy will also be negative items on your credit report. After bankruptcy, you may not be eligible for new loans and credit for years after you file.
While you can't stop the negative impact of bankruptcy on your credit, there are things you can do to improve it over time.
Try to avoid adding any new negative items to your credit report by sticking to a budget, paying all your bills on time and avoiding building new debt.
Here are four ways to improve your financial profile that will help you get credit and work on restoring your score: secured loan, secured credit card, co-signed credit card or loan and authorized user status
You’re already seeking redemption, so you can’t put yourself in a position where you’re begging for forgiveness for late payment or struggling to keep up with mounting credit balances, so be vigilant about paying on time.
When your recent history finally shows you are a good credit risk, your vigilance in restoring your credit reputation will pay off.