How Long Does It Take To Rebuild Credit After Chapter 7?

Chapter 7 is also called straight bankruptcy or liquidation bankruptcy. It’s the type most people think about when the word “bankruptcy” comes to mind. In a nutshell, the court appoints a trustee to oversee your case. Part of the trustee’s job is to take your assets, sell them and distribute the money to the creditors who file proper claims. The trustee doesn’t take all your property. You’re allowed to keep enough “exempt” property to get a “fresh start.”

Advantages of Chapter 7 Bankruptcy

Chapter 7 bankruptcy is an efficient way to get out of debt quickly, and most people would prefer to file this chapter, if possible. Here’s how it works:
• It’s relatively quick. A typical Chapter 7 bankruptcy case takes three to six months to complete.
• No payment plan. Unlike Chapter 13 bankruptcy, a filer doesn’t pay into a three- to five-year repayment plan.
• Many, but not all debts get wiped out. The person filing emerges debt-free except for particular types of debts, such as student loans, recent taxes, and unpaid child support. You can protect property. Although you can lose property in Chapter 7 bankruptcy, many filers can keep everything that they own. Bankruptcy lets you keep most necessities, and, if you don’t have much in the way of luxury goods, the chances are that you’ll be able to exempt (protect) all or most of your property.
• You can keep a house or car in some situations. You can also keep your house or car as long as you’re current on the payments, can continue making payments after the bankruptcy case, and can exempt the amount of equity you have in the property.

Who Should File for Chapter 7 Bankruptcy

Chapter 7 works very well for many people, especially those who:
• own little property
• have credit card balances, medical bills, and personal loans (these debts get wiped out in bankruptcy), and
• whose family income doesn’t exceed the state median for the same family size.

You’ll take the means test to see if your income qualifies for this chapter. If your income is below the average income for a family of the same size in your state, you’ll automatically qualify. If your income is higher than the median, you’ll have another opportunity to pass. However, if after subtracting allowed expenses, including payments for child support, tax debts, secured debts such as a mortgage or car loan, you have income left over to make a significant payment to your creditors, you won’t qualify to file for Chapter 7 bankruptcy.

Chapter 7 Bankruptcy Requirements

Some debtors cannot file for Chapter 7 bankruptcy leaving Chapter 13 bankruptcy as the only option. You cannot file for Chapter 7 bankruptcy if both of the following are true:
• Your current monthly income over the six months before your filing date is more than the median income for a household of your size in your state.
• Your disposable income, after subtracting certain expenses and monthly payments for debts you would have to repay in Chapter 13 bankruptcy, exceeds certain limits set by law. These calculations are referred to as the “means test.” They determine whether you have the means to repay a certain amount of your debt through a Chapter 13 repayment plan. If you do, you flunk the test and are ineligible for Chapter 7 bankruptcy. The means test can get fairly complex, and, to make matters worse, uses unique definitions of “disposable income,” “current monthly income,” “expenses,” and other important terms, which sometimes operate to make your income seem higher, and your living expenses lower, than they are.

Bankruptcy laws were enacted to provide you with relief from your creditors by giving you a fresh start. This fresh start usually comes with a high price, namely, a major hit to your credit. But there are ways that bankruptcy can actually help your credit in the short and long term. This will depend on your credit score, financial circumstances, and other factors. A credit score is a number that supposedly summarizes your credit history and predicts the likelihood that you’ll default on a debt. Lenders use credit scores to decide whether to grant a loan and at what interest rate.

FICO scores—the most common type of credit score—range from 300 to 850. A FICO score is based on the information in your credit report, including:
• your debt payment history
• how much debt you currently have (including your debt-to-credit ratio)
• your different types of credit
• how long you’ve had credit, and
• whether you have new credit.

A high FICO score generally means that you’re good at managing your finances, while a low FICO score usually means that you have been delinquent with credit payments, have high unpaid debt balances, gone through a foreclosure, filed for bankruptcy, or experienced other problems repaying debt.

How Bankruptcy Affects Your Credit Score

When you file bankruptcy, your credit score can be negatively impacted almost right away. In fact, many consider bankruptcy as the worst impact to your credit score, compared to foreclosure and other debt collection actions. But no one knows exactly how much damage certain events, like bankruptcy, foreclosure, a short sale, or deed in lieu of foreclosure will do to your credit. This is due to many factors, such as:
• Credit scoring systems change over time.
• Credit scoring agencies do not make their formulas public, and your score will vary based on your prior and future credit practices and those of others with whom you are compared.
• Creditors use different criteria in evaluating consumers for credit, and these also change over time.
If you have a good credit score, but file bankruptcy anyway, you will probably suffer the most. That is because the higher your pre-bankruptcy score, the bigger the drop in your score after you file bankruptcy. On the other hand, if you already have a low credit score, bankruptcy won’t hurt your score that badly. According to FICO, a person who has a credit score of 680 prior to a bankruptcy loses 130 to 150 points following a foreclosure. But a person who has a credit score of 780 prior to a bankruptcy loses 220 to 240 points. So, if you already have a low score and file for bankruptcy, this could potentially make it easier for you to improve your score post-bankruptcy.

How Bankruptcy Can Help You Anyway

If you find yourself in a position where you must file bankruptcy, then your credit score is not as important as the reasons for having to file bankruptcy. Getting a new loan or credit card is not as pressing as, for instance, a pending wage garnishment or mortgage foreclosure. Nevertheless, after you have obtained bankruptcy relief, you may find that the bankruptcy may actually help your credit. This is so even though the bankruptcy will remain on your credit report for up to ten years.

Short-Term Positive Effects

In some cases, you might see immediate results on your credit after bankruptcy. Getting rid of “delinquent” account reports. If your credit report contained late payments and high credit balances, this is where a bankruptcy discharge can serve the greatest good. A bankruptcy will essentially wipe those debts clean. This is because debts that are discharged in bankruptcy must no longer be reported as “delinquent.” Instead, they will typically be reported as discharged or included in your bankruptcy. In some instances, this could even boost an already low credit score.
Improving your debt-to-credit ratio; the amounts you owe on accounts makes up roughly 30% of your FICO credit score.

An important factor in this analysis is the percentage of your available credit that you’re using. Bankruptcy might help improve your debt-to-credit ratio. This ratio is a comparison of your outstanding debt to your available credit balance. The lower your debt compared to your available credit, the higher your potential FICO score. If you have credit accounts with high credit limits, they are normally closed or frozen when you file bankruptcy. But if you reaffirm debts with low balances and good credit limits, or obtain new credit accounts after your discharge, this can potentially boost your FICO score. That is because you have little to no outstanding debt compared to available credit limits, which results in a favorable debt-to-credit ratio.

Long-Term Positive Effects

By wiping your debt history clean, bankruptcy gives you the opportunity to start over. You have another chance to get your finances right. If you budget properly and are disciplined with your money, you can lay the foundation for building good credit history. Following the bankruptcy, it’s a good idea to start re-establishing your credit as soon as possible. By not being burdened with the outstanding debt that you discharged in the bankruptcy, you should have more disposable income to make credit payments on time. If you establish a good track record of paying your new, post-bankruptcy debts on time, you can increase your credit score over time. This might happen as early as six months to a year after bankruptcy.

Budgeting After Chapter 7 Bankruptcy

Many people file for bankruptcy due to no fault of their own after experiencing an unexpected event, such as an illness, job loss, or divorce. Even so, everyone can benefit from cutting unnecessary costs and building a nest egg to fall back on; not just those who filed for bankruptcy to wipe out credit card balances. Reviewing your spending habits and making a comfortable budget is a commonsense place to start. Avoid buying items on credit that you can’t afford to pay for in cash. If you take out new credit cards, pay off most, if not all, of your account balance each month so that you don’t accrue interest.

Credit Scores After Chapter 7 Bankruptcy

Filing for bankruptcy comes with a downside; it can hurt your credit initially. Although a Chapter 7 bankruptcy will usually stay on your credit report for ten years, the impact goes down with time. Your bankruptcy won’t prohibit you from obtaining new credit and moving on with your life. If you’re like most, your case will move through the process in about four months, and you’ll be able to begin rebuilding your credit after receiving your bankruptcy discharge. In fact, most debtors start receiving new credit card offers shortly after they receive their discharge. Credit card companies realize that your discharge will free up money for other bills, so you’re more likely to pay back your debts after bankruptcy. Plus, you won’t be able to wipe out debt again using the bankruptcy process for several years.

Rebuilding Credit After Chapter 7 Bankruptcy

Keeping your available credit high is a factor that drives up your credit score, along with maintaining a mix of credit types, such as a home loan, car loan, and credit card accounts. So when you begin using credit again, you’ll want to keep balances below 30%. You will typically begin to receive new offers for credit after bankruptcy. However, be aware that many new credit card offers will have low limits, high-interest rates, and high annual fees. Reviewing the offer terms carefully before signing up for a new credit card after bankruptcy is essential. The goal is to accept a credit card with the highest possible limit because credit reporting agencies rate you based on your total available credit. Not only can lower limits can harm your score, but you’ll want to pay off the majority of your balance each month. If you don’t qualify for a typical, unsecured credit card, you might want to start rebuilding your credit by getting a secured credit card from your bank. You’ll deposit a certain amount of money in the bank as collateral for the card. In exchange, you have a line of credit equal to the amount in the account. A secured credit card rebuilds credit because the creditor typically reports payments on your credit report—you’ll want to be sure that will happen.

Also, it’s essential to examine your credit report for mistakes after your discharge. If you notice an error, correct it promptly so that it doesn’t derail your efforts to rebuild your credit. You can check your credit report for free using annualcreditreport.com (use the official site, not a lookalike). You’re entitled to one free copy per year from each of the three reporting agencies. Requesting a report from one of the three agencies every four months is an excellent way to keep track of changes. Also, all of the three reporting agencies allow you to file a dispute online. Your payment history, on-time payments, and recent credit reporting can all affect how lenders work with you. Once you file bankruptcy and businesses see your credit report’s negative information, you may have concerns about:
• Getting a car loan
• Buying a house or renting an apartment
• High-interest rates on financing
• Low credit limits on unsecured credit cards
• Student loan repayment schedules
• Penalties for late payments
• Credit utilization for anything but necessities
• Getting large cash deposits
• Getting loans without a qualified co-signer
• Adding authorized users to some credit cards
• Security deposits and returns of safety deposits

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!