Rebuilding your credit after bankruptcy: the basics

It is possible to rebuild your credit after bankruptcy and come out in a much better financial position.

Many people are afraid to take the much-needed step of filing for bankruptcy because they fear what it will do to their credit. Those same people may assume that a bankruptcy filing will haunt them for the rest of their financial lives, and that they will never again be able to purchase a vehicle, get a mortgage or responsibly use credit cards. Thankfully, those assumptions are wrong, and it is possible to have a bright financial future following bankruptcy.

To file or not to file, that is the question

Sometimes, delaying a bankruptcy filing does much more harm to a person's credit rating and credit score than the filing itself. If you are dealing with unmanageable debt to the point where you've thought seriously about seeking help, you are likely behind on your auto loan or mortgage payments, you may have credit card companies calling you about your bills, and, if you are like most Americans, you likely have some form of medical-related debt that you simply cannot pay. Once you get behind on bills, your creditors will start reporting your delinquency to the credit bureaus. Every bill you pay late - even if you are only a day or two behind - could significantly lower your credit score.

Interestingly, a Chapter 7 or Chapter 13 bankruptcy filing can have the short-term effect of actually raising your score. This is because creditors stop attempting collection activity and may stop reporting delinquencies to the credit bureaus. Of course, that effect doesn't last forever, and the bankruptcy filing itself will appear on your credit report. Even so, your financial future can still be a bright one following bankruptcy.

The aftermath

Once your bankruptcy case has been completed (and your debt has been discharged through a Chapter 13 repayment plan or a Chapter 7 liquidation), you can begin the process of rebuilding your credit.

An excellent way to do that is through a secured credit card. Many banks offer these, and though many of them come with slightly higher annual interest rates and an annual fee, they are essentially low-risk for lenders because your credit limit is capped at the amount of money you have in an account especially dedicated to the card. For example, if you deposit $500 into the account, then your credit limit on the card will be $500. Even with a small limit, though, if you make regular charges and pay them off monthly, your credit rating will improve.

Another way to rebuild your credit rating is to purchase a new or used vehicle. You may pay a higher premium (in the form of a higher interest rate) to finance a car or truck following bankruptcy, but making those regular, timely payments is an excellent way to beef up your credit history.

Many people are even able to get or refinance a mortgage as soon as a year or two after their bankruptcy case is finalized. Yes, the money might initially be at a slightly higher interest rate, but once the bankruptcy has cleared from your credit report - usually between seven and 10 years - you might be able to refinance.

Getting started

Would you like to learn more about the bankruptcy process? Are you curious about how to rebuild your credit after bankruptcy? Have you been considering bankruptcy as a way to clear some of your unmanageable debt? If the answer to any of these questions is "yes," speak with a bankruptcy attorney today.

Keywords: bankruptcy, Chapter 7, Chapter 13, repayment plan, liquidation, credit

Frequently Asked Questions

  • I hear bankruptcy is a lot harder to file now. What is the difference?
    • Since Congress passed the new bankruptcy law in 2005, it is necessary to take two bankruptcy counseling courses. The first bankruptcy counseling course must be taken before you can file your bankruptcy petition, and the second bankruptcy counseling course must be taken before the court will issue the discharge order relieving you from your debt. Both bankruptcy counseling courses can be taken on-line for a small fee, and can be done in a few hours.

      There are also stricter requirements on who can get a total discharge of debts under a Chapter 7 bankruptcy. You must earn under a certain annual income for your area of residence, or you must be able to pass a means test provided for by the bankruptcy law. Under this means test, your income is matched against a formula for average monthly expenses in your area of residence to determine your monthly disposable income. Your debts are compared with your monthly disposable income to determine if you can afford to pay your debts. If you do not pass the means test, you may still get bankruptcy protection through a Chapter 13 bankruptcy where you pay some or all of your debts through a payment plan. While these restrictions limit some people, the bankruptcy attorneys at Bailey & Gunderson have found that the vast majority of people who need the protection of a bankruptcy are still able to take advantage of it.

  • Can I get all debts discharged through Bankruptcy?
    • Under Chapter 7 bankruptcy, you may get a total discharge of your debt. However, some of your debts may not be dischargeable. For instance, income taxes may not be discharged except where the debt is at least three years old, and you filed your income tax return timely. Student loans and child & spousal support obligations are also not dischargeable. Debts incurred through fraud are, likewise, not dischargeable. You may, however, apply to pay these debts through a Chapter 13 payment plan. The bankruptcy attorneys at Bailey & Gunderson can show you how.

  • What happens in a Chapter 13 bankruptcy plan?
    • In a Chapter 13 Bankruptcy plan, you typically pay your debts over a 3 to 5 year period. Each month, you make a payment amount (usually through a wage deduction order from your paycheck) which is then distributed by the bankruptcy trustee to your creditors. Secured debts, such an automobile loan, shall be paid through your Chapter 13 bankruptcy plan. Your non-secured debts will be paid from 1% to 100% of the total amount of your non-secured debt, and will be paid interest-free. The percentage of your non-secured debt that you must pay will initially be determined by the bankruptcy attorneys at Bailey & Gunderson. Once you have completed your Chapter 13 Bankruptcy plan, any remaining debts not paid through your Chapter 13 bankruptcy plan shall be discharged.

  • Will I lose my house, car or retirement savings by filing Bankruptcy?
    • The bankruptcy attorneys at Bailey & Gunderson will work with you to minimize the assets (if any) you may have to surrender when you file for bankruptcy. You are entitled to keep a certain amount of assets, which are "exempt", from seizure by creditors or the bankruptcy trustee. If the Chapter 7 bankruptcy exemptions do not provide enough protection, the bankruptcy attorneys at Bailey & Gunderson can develop a Chapter 13 bankruptcy plan that will preserve your assets.

      Working without an attorney, or with inexperienced counsel, may result in unpleasant surprises for you, as you may have to forfeit assets that you could have saved with better planning. The bankruptcy attorneys at Bailey & Gunderson can show you how.

      The attorneys at Bailey & Gunderson have filed over 1,000 bankruptcy cases. We offer a free initial consultation, and reasonable payment plans for our bankruptcy clients.

      Since 1995, the law firm of Bailey & Gunderson has assisted bankruptcy clients in the greater Cincinnati area (Hamilton, Clermont, Butler, Warren, and Brown Counties). If you have questions or need information about bankruptcy, please call our Cincinnati office at 866-540-8424, or email us.

  • Why Choose a Dissolution of Marriage?
    • A dissolution of marriage offers many advantages over a traditional divorce. The first consideration for many couples is that a dissolution of marriage is a much faster process than a contested divorce. Once your petition for dissolution of marriage has been filed, a hearing before a judge or magistrate shall occur within 30 to 45 days. A dissolution of marriage is usually much less expensive - both in terms of attorney fees and costs, as well as emotionally, because the spouses resolve the issues between them by agreement.

      It is a common misunderstanding that in a dissolution of marriage, the couple hires one attorney who works with them to resolve the issues and generate a separation agreement. In fact, an Ohio attorney can only represent one of the spouses. The family law attorneys at Bailey & Gunderson help to identify all of the issues which need to be addressed in your unique situation. Our firm will work with you to identify all of the assets and debts associated with the marriage, and to determine the most equitable and fair distribution of those assets and debts between the spouses. We also are committed to serving the best interests of your children. Some parents choose to have a shared parenting plan, which allocates the parental rights and responsibilities between the parents, including parenting time, child support, decision making, and payment of health insurance & expenses.

  • What Factors Does a Child Support Calculation Take Into Account?
    • Ohio child support law uses a formula to calculate child support. The law and the formula it establishes look at a number of factors in determining child support. These factors include:

      * The number of children involved

      * The gross annual income of both parents

      * The monthly child support obligations of either parent for other children

      * Existing spousal support obligations from previous marriages

      * Monthly day care, education and health care expenses

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