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How Long Does It Take to Recover from Bankruptcy?

Contrary to what most individuals believe, filing for bankruptcy can be good for your financial health. The chances are that if you’re already considering bankruptcy, your credit is suffering big time, and you’re tired of being harassed by creditors and collection agencies.

Even better, bankruptcy filing helps you with your credit by eliminating many of your debts and improving your credit rating eventually. But bankruptcy doesn’t wipe your credit history, and it’ll reflect on your credit files for years.

This post will detail bankruptcy, including its benefits, how long it takes to recover from bankruptcy, and how to recover from the so-said menace.

Let’s dive right in!

What is bankruptcy, and what are the benefits of filing for bankruptcy?

Bankruptcy is a legal proceeding involving a business or an individual who’s unable to repay their outstanding debt. The bankruptcy process starts with a petition by the debtor or on behalf of creditors (less common).

Bankruptcy provides businesses or individuals with the chance of a fresh start by forgiving debts that can’t be paid. The process also allows creditors to obtain some measure of repayment based on business’s or individual’s assets available for liquidation.

Each year, hundreds of thousands of American citizens file for bankruptcy – and understandably so. It improves their credit scores, saves them harassment from creditors and collectors, etc.

Here are some of the benefits of filing for bankruptcy:

  1. Improved credit scores
  2. Discharge certain debts, including personal loans, medical bills, student loans, credit card debt, etc.
  3. The automatic stay that halts all the debt collection efforts

How long does bankruptcy stay on my credit report?

The time it’ll take you to clear a bankruptcy from your credit file will vary depending on various factors. This includes the type of bankruptcy you have filed and the volume of debts you have to clear.

However, most bankruptcies will reflect on your report for a similar period as a late payment. Here is how long bankruptcy stays on your credit file compared to other negative information:

  • Chapter 7 bankruptcy: 10 years
  • Chapter 13 bankruptcy: 7 years
  • Late payments: 7 years
  • Foreclosures: 7 years
  • Public record: 7 years
  • Collections: 7 years

Let’s look more into the chapter 7 and chapter 13 bankruptcy:

Chapter 13 bankruptcy:

Also called a wage earner’s plan, the Chapter 13 bankruptcy is a debt repayment plant that allows persons with regular income to develop a plan to pay some or all of their debts. The debtors propose a repayment plan to make installments for a certain period of time – usually three to five years.

Once the plan is completed, the remaining unsecured debt is discharged or eliminated. So, how long does it take you to recover from the Chapter 13 bankruptcy?

Usually, the completed Chapter 13 bankruptcy and the accounts used in the program take around seven years after the date of filling to disappear. The ineligible accounts are also removed from the report soonest possible.

It’s important to note that the bankruptcy effects on your FICO score reduce over time and starts when you initially file bankruptcy. The credit rating will increase as you make the monthly payments.

Chapter 7 bankruptcy:

Also known as the liquidation bankruptcy, the chapter 7 bankruptcy is the simplest, quickest, and most common type of bankruptcy. It’s called liquidation bankruptcy because it discharges most of your unsecured debt.

If you choose to pursue the chapter 7 bankruptcy, it’ll generally take ten years to disappear from your credit reports after the filling date. A bankruptcy trustee is usually appointed to your debt case and will liquidate all your nonexempt assets to pay your creditors.

Once your assets are liquidated, any remaining debt is discharged, and a record of it will disappear after 7-10 years.

What do I do after filing for bankruptcy?

Once you’re declared bankrupt, I’m sure you’ll want to put it behind you as quickly as possible, right? Well, if that’s you, here are a few things you can do:

Save all paperwork from your bankruptcy case

It may not feel like an important thing, but you should save all paperwork from your bankruptcy case. You may be requested to hand in the files in the future, especially when applying for mortgages, personal loans, or other financial products.

Save money

Once you’re declared bankrupt, the last thing you want is to fall into debt again. Start saving money for emergencies, watch your daily spending, and create a budget to ensure this doesn’t happen.

You may also get credit counselors to help you make the right savings and credit decisions.

Work on repairing your credit score

Life after bankruptcy can be tricky. You’ll have a fresh financial start, but you’re also obligated to repair your credit if you want to enjoy the benefits of good credit, like low-interest rate loans.

The good news is that there are ways to bounce back after bankruptcy. Below are a few best ways to recover from bankruptcy:

Ensure your report has the right accounts

After your debts are discharged, you should review your credit reports to ensure that only the accounts involved in your bankruptcy are listed. These accounts should be listed as ‘included in bankruptcy or ‘discharged.’

If you find errors, like the wrong accounts listed, please report them to credit bureaus or contact your trusted bankruptcy attorney. It might take several months to remove the errors from your credit file, but it’ll eventually happen.

Make on-time payments

Your payment history plays a crucial role in your credit rating, with FICO stating that it accounts for 35% of your score. Making timely payments for your debts and bills is key to maintaining a positive payment history.

For instance, if you have a car loan and it’s not included in the bankruptcy, you’re using the vehicle, and you need to continue paying the loan in time. Also, you should be on top of your other bills, including cell phone bills, utility bills, medical bills, etc.

Rebuild your credit with a secured card

Once the bankruptcy is over, visit several credit card issuers to request a secure credit card. Then, ensure that you make all your current payments on time with the secured card to improve your credit.

You may request the credit card companies to increase your credit card limit, which will reduce the utilization ratio. Also, avoid late payments of the credit for a good credit score.

Increase your credit mix

Your credit mix makes up a significant portion of your credit score. So, you may open new accounts to help you rebuild your credit score.

Having a home loan, car loan, personal loan, etc., and paying them on time will increase your credit score more than having one loan at a time. However, you should do this over several years or months, not immediately after bankruptcy.

For instance, you may wait for a year after bankruptcy to apply for a credit builder loan. This loan allows you to make a security deposit into a savings account, followed by monthly payments over a set period, after which you receive the sum of the loan amount.

Like a new secured credit card, a builder loan is often used by individuals with bad credit scores to increase their rating.

Stay away from high-interest products

After a bankruptcy discharge, avoid subprime lenders, pawnshops, car loan firms, or other financial products with high-interest rates. You want to make sure you can afford the bills and finance your loans if you wish for a quick and full recovery.

Consider such financial institutions as banks and credit unions with better loan terms if you must borrow. You may also consider other sources of funds, including a family member or a retirement fund loan.

Make an emergency fund

An emergency fund is crucial to bail you out whenever you find yourself in a straining financial situation. Open a savings account as early as possible and start making regular deposits (however small they are).

Think about your financial future

After filing for bankruptcy, start working on your financial future. For instance, you may start saving to go back to school and buy a home or a car.

Sign up for a free credit score service

You can consider signing up with a free credit score service that’ll help you keep an eye on your credit report to ensure that you’re not a victim of identity theft. You may even watch your credit score grow, and you start to get offers from lenders.

Once you achieve a credit score of 700 or higher, you’ll begin to receive mainstream offers. Your main goal should be to graduate from a secured credit card to a standard one and keep your credit utilization low.

The bottom line

Let’s face it: bankruptcy can be embarrassing, painful, and devastating to your credit report, but its promise of a ‘fresh start’ is real. If you have a good plan, you can recover from bankruptcy and restore your creditworthiness within a few years.

This post provides you with information to help you recover from bankruptcy. Good luck as you purpose to use it to recover fast.