Navigating Bankruptcy: A Guide to Recovery and Rebuilding Credit

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How Does Bankruptcy Work?

Bankruptcy can be a lifeline when debts become overwhelming, but it has significant, long-lasting impacts on your credit. It should be considered a last-resort option. In the U.S., bankruptcy is managed by federal courts and provides a way to repay part of what you owe.

There are two types of bankruptcy for individuals: Chapter 7 and Chapter 13. Chapter 7, or liquidation bankruptcy, is for those with low income and erases many debts but may require forfeiting some assets. Chapter 13, or a wage-earner’s plan, is for those with enough income to repay part of their debts over three to five years, allowing them to keep more property.

Not all debts are eliminated by bankruptcy. Obligations like alimony, child support, and certain student loans remain. However, most other debts are discharged, meaning you are no longer responsible for them, and creditors cannot collect them.

All bankruptcy applicants must complete court-approved credit counseling and meet specific eligibility criteria. Note that secured debts, like a mortgage or car loan, can still result in property seizure if payments are missed.

Why Is Bankruptcy So Bad?

Bankruptcy has several negative consequences:

You Can Lose Your Home or Car

Bankruptcy can temporarily halt foreclosure or repossession, but it may not prevent the loss of assets used as collateral for secured debts. Chapter 13 can help you catch up on missed payments, while Chapter 7 may not stop creditors from seizing collateral if payments are not made.

You’ll Pay Filing and Attorney Fees

Filing for bankruptcy involves court administration fees and possibly additional court-imposed fees. Hiring a bankruptcy attorney is advisable, and while fees vary, they are kept reasonable by bankruptcy courts. Chapter 7 requires upfront payment, while Chapter 13 allows legal fees to be included in the repayment plan.

Your Credit Score Will Likely Suffer

Bankruptcy remains on your credit report for seven years (Chapter 13) or ten years (Chapter 7), significantly impacting your credit scores. The extent of the impact depends on your credit score before filing and any prior negative entries.

You May Have a Hard Time Getting New Credit

Some lenders may decline credit applications from those with a bankruptcy on their report. Others may accept applications but charge high interest rates and fees.

How to Rebuild Your Credit After Bankruptcy

Rebuilding credit after bankruptcy takes time, but you can start immediately after discharge with these steps:

Get a Secured Credit Card

Secured credit cards require a cash deposit as collateral. Using the card responsibly and making timely payments can help rebuild your credit.

Take Out a Credit-Builder Loan

Credit-builder loans help establish or rebuild credit. The borrowed amount is placed in a savings account, and timely payments add positive information to your credit report.

Become an Authorized User

Ask a friend or family member with good credit to add you as an authorized user on their credit card. This can positively impact your credit score.

Seek a Cosigner

Having a cosigner with good credit can improve your chances of loan approval and favorable terms. The cosigner agrees to pay off the loan if you cannot.

Try Experian Boost®

Experian Boost can add on-time payments for utilities and other bills to your credit report, helping to improve your score.

The Bottom Line

Bankruptcy can provide relief from overwhelming debt but has severe consequences for your credit. Its effects will fade over time, and you can track your credit’s recovery by checking your FICO® Score for free from Experian. Eventually, you can move past bankruptcy and its impacts.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you navigate your financial journey.

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