One of the biggest worries you may have about filing for bankruptcy is what kind of financial shape you will be in once the process is over. Will you have anything left? Will you ever be able to take out a credit card or loan again?
These questions can keep you up at night. But the good news is that bankruptcy does not leave you impoverished, and it is possible to begin rebuilding your credit once your debts are discharged.
An overview of Chapter 7 and Chapter 13
First, it helps to have a basic understanding of consumer bankruptcy.
In a Chapter 7 bankruptcy, your non-exempt assets are sold, and the funds earned will be used to pay your creditors. You get to keep your exempt assets. Once the funds from the sale run out, many of your remaining debts are extinguished.
In a Chapter 13 bankruptcy, you will enter a repayment plan overseen by a bankruptcy trustee. Instead of liquidating your assets, you will make affordable monthly payments for three to five years. Once the payment period is over, many of your remaining debts are extinguished.
At the end of either process, the court will discharge of many of your debts, although some may remain. You are not left impoverished, and it is possible to rebuild your credit.
Filing for bankruptcy will not ruin your credit forever
Filing for bankruptcy will affect your credit, but only temporarily.
A Chapter 7 bankruptcy will show up on your credit report for 19 years. A Chapter 13 bankruptcy will remain on your report for seven years. Your credit score will see a significant uptick once these bankruptcies are taken off your credit report.
In addition, you can increase your credit score even before the seven or 10 years are up.
For example, you can obtain a secured credit card or small installment loan. These accounts are funded by you, not unlike a debit card. You borrow from these funds and pay them back monthly. This helps rebuild your credit.
If you take on new debt after bankruptcy, making one-time payments in full helps out your credit score as does keeping balances below 30% of your credit limit.
If you borrow responsibly and pay back debts on time while your bankruptcy remains on your credit report, you can increase your credit score even before the bankruptcy is wiped from your records. This can leave you in a strong financial position giving you the fresh start you need.