Filing for bankruptcy is a hard decision. This decision negatively impacts your credit and can remain on your credit report for up to 10 years.
The definition of bankruptcy is when an individual or a business can’t repay its debts. An array of legal proceedings follow, in which the debtor, or the party that owes money, has all of their assets evaluated. Creditors and other lenders then receive the liquidated assets — such as property or vehicles — to repay a portion of the debt.
Read on to learn about what bankruptcy is, the different types of bankruptcy, how long bankruptcies stay on your credit report, and a list of recommendations for rebuilding your credit after filing for bankruptcy.
How can bankruptcy impact my credit score?
Bankruptcy can severely hinder your chances of obtaining a loan, financing a mortgage, being approved for credit cards, or renting an apartment. Luckily, its impact on your credit score shrinks as time goes on.
On the surface, bankruptcy seems negative, but it can also serve as a fresh start for struggling individuals and businesses. Filing for bankruptcy means that the debts you can’t repay are forgiven, and lenders still receive a certain amount of repayments through the liquidation of your assets.
How bankruptcy affects your credit score depends on the specific type of bankruptcy. That said, if an individual is filing for bankruptcy, they most likely have a bad credit score already.
Common types of bankruptcy
Judges in the US federal courts handle bankruptcy cases. An individual called a trustee is appointed to the case and represents the debtor. The two most common types of bankruptcy that individuals file for are Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy
This applies to individuals who file for bankruptcy but have little to no assets. This decision frees them of their unsecured debts, including credit card balances and medical expenses. Any unique assets like coin or stamp collections, family antiques, or cash are liquidated and used to pay off some debt. Those who own nothing except clothing and household objects usually won’t pay off any of their debt.
Chapter 7 bankruptcy remains on your file for 10 years. When this period ends, it’s removed from your credit report.
Chapter 13 bankruptcy
This applies to individuals who earn too much money to qualify for Chapter 7 bankruptcy. Those with a steady income can develop more suitable repayment plans, usually over three- to five-year periods. If you’re able to pay back your loans, you can keep most of your assets.
This type of bankruptcy stays on your record for seven years after the filing date.
Chapter 11 bankruptcy
Chapter 11 bankruptcy applies to struggling businesses. The goal of filing for this type of bankruptcy is to help the businesses be profitable again. Businesses can establish new strategies and cut costs to generate more revenue. Lastly, a company can still operate as usual while working to repay its debts.
Other types of bankruptcies
The following types of bankruptcies, while less common, apply to specific situations and parties.
Chapter 9 bankruptcy
When cities, towns, or school districts are in dire financial straits, no liquidation of assets occurs, but adjustments take place to produce a more achievable repayment schedule.
Chapter 12 bankruptcy
Like cities and towns, family farms and fisheries can continue working while simultaneously making efforts to pay back their debts.
Chapter 15 bankruptcy
Chapter 15 bankruptcy was added to the law in 2005 and is filed for in the debtor’s country of origin. This type of bankruptcy applies to debtors and creditors who may move back and forth between multiple countries. People who do business in several countries but have a legal presence in the US can file for bankruptcy in the US court system. They file for Chapter 15 after filing for bankruptcy in their country of origin. This isn’t very common.
All declarations of bankruptcy enter into public records.
5 ways to rebuild credit after bankruptcy
To many, bankruptcy may seem like a hole you cannot climb out of, but this isn’t true. There are steps you can take to start rebuilding your credit after filing for bankruptcy.
Tip #1: Review your credit reports. If you don’t know where you stand, you can’t take measures to repair your credit. Frequently monitoring your reports is a simple and smart way to stay abreast of your expenses. Plus, if any errors show up in your credit report, you’ll be able to dispute them sooner rather than later.
You’re entitled to free weekly reports from AnnualCreditReport.com as well as a free credit report from the three major credit bureaus — Experian, Equifax, and TransUnion — once a year. It is best to take advantage of this.
Tip #2: Make on-time payments. Payment history accounts for 35 percent of your overall score. It is the single most significant factor in calculating your score, according to two of the most popular credit score models, FICO and VantageScore. Making payments on time consistently will boost your score and improve your credit history.
If you’re worried about late payments or missing due dates, you can set up automatic payment transfers or notifications.
Tip #3: Use the right credit card. Credit cards are convenient and straightforward when it comes to making everyday purchases. But depending on the card, you may also face annual fees, minimum balance payments, and steep interest rates. Don’t be afraid to do your research and find a more affordable card.
Not using a credit card can help you avoid this entirely. One fantastic tool for you to consider is Point Card.
No credit check is required for Point Card membership. Whether you’re looking to begin building credit or to repair it, you’ll be able to breathe easier knowing that just like you work hard for your money, Point works just as hard for you in return.
Point is a transparent, easy-to-use alternative payment card that allows cardholders to exercise fiscal independence and spend their own money as they see fit. All users receive exclusive benefits, including unlimited cash-back and bonus cash-back on subscriptions, food delivery, rideshare services, and coffee shop purchases.
Alongside Point’s extensive rewards program that helps you grow your wealth over time, Point membership also comes with various safety measures that protect your wealth. Car rental and phone insurance, new purchase insurance, two free ATM withdrawals each month, fraud protection with zero liability, and no interest fees are just some of these features.
Tip #4: Make a budget. Setting realistic goals and being accountable for every dollar you spend is a big aspect of many budgeting techniques. There are many budgeting plans that you can choose from, so you don’t have to worry about adjusting your lifestyle too much. If you are unsure where to start, don’t be afraid to consult a financial advisor.
Tip #5: Improve your credit utilization. Credit utilization is the second most significant aspect of your credit score, accounting for 30 percent. Exceeding your predetermined credit limit will harm your score. Experts recommend keeping your utilization below 30 percent of your available credit to prevent this from happening.
As of 2021, the average US credit scores according to FICO and VantageScore were 711 and 688, respectively. While those numbers may seem high, keep in mind that there is no “perfect credit score.” Scores, just like your finances, are constantly changing. Making a conscious effort to improve your credit is all that matters.
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