Recovering From Bankruptcy
What you can expect in the first two years after bankruptcy.
Filing for bankruptcy should not be a financial monsoon that sweeps away your credit freedom for the rest of your life.
Bankruptcy can offer a fresh start to individuals with overwhelming debt who are seeking ways to brighten their financial horizon. But, improving your credit standing, like diminishing your credit standing, happens over a period of time.
While bankruptcy remains on credit reports for years, if you maintain a good credit history after filing for bankruptcy some lenders oftentimes extend credit for auto and home loans 18 to 24 months after a bankruptcy discharge.
In 2008, more than 1.1 million Americans filed for bankruptcy, a 32 percent increase from the year before, according to the Automated Access to Court Electronic Records. As the U.S. attempts to recover from an economic recession, a credit crunch has created a few hiccups as lenders tighten up credit standards for loan applicants across the board.
The turbulent markets could make the road to credit redemption a little longer, but don't fret -- instead focus on long-term financial freedom.
Know that every application for credit is judged on an individual basis, so the length of time it takes to repair your credit will vary.
What might your recovery period look like?
The First Six Months
The most damage to your credit will be immediately after you file, says Candy Wright, group manager of counseling at GreenPath Debt Solutions (www.greenpath.com), a non-profit consumer-counseling service. "If you have accounts that you're not including, like a mortgage, that will actually help your credit over time if you keep your account current."
First, you should find an experienced and trustworthy lawyer who specializes in bankruptcy, or seek low-cost legal aid services.
Take the time to learn the difference between Chapter 7 and Chapter 13 bankruptcy and which works best for you. Under Chapter 7, also referred to as "liquidation bankruptcy," you pay nothing to unsecured creditors, but may be required to liquidate non-exempt assets (like a house or car worth more than a certain amount). Chapter 13, often called a "wage-earner's plan," means you pay back a portion of your debts over a period of time and are not required to liquidate assets.
Next, be prepared to spend up to six months awaiting bankruptcy discharge, which releases the debtor from personal liability for some or all of his or her debts. During this time, creditors are notified and given time to respond to your bankruptcy claim. You should not pursue any new credit during this period.
Six Months to a Year
Your credit history won't clear up immediately -- even if you're current on your bills, it will take several months for your credit to improve on paper.
"After six months to a year, if you're in good standing, then you will establish a track record of turning yourself around that will be reflected in your score," says Director of Consumer Education Steve Katz of TrueCredit (www.truecredit.com), a credit monitoring agency. "Keep in mind the impact of bankruptcy is a lot of late payments, and if you have a foreclosure you might still be accountable for that mortgage and those things can linger on for quite awhile."
If you re-affirm debt, or agree to repay a portion of a debt, the positive effects of repayment will begin to show up on your credit report. If not, rental payments or other types of credit that are reported to credit bureaus may have a positive impact as you re-establish your credit.
The First Year
Request your credit report from all three credit bureaus after bankruptcy the first year and each subsequent year. As you begin to rebuild your credit, it's important to track your credit history and remain in good standing.
"It's kind of like your report card from school, so you want to try to always improve your score," says Ralph R. Roberts, a bankruptcy and foreclosure expert and creator of KeepMyHouse.com. The way to improve: Pay on time, every time.
The Second Year and Beyond
Each year after the first has less of an impact on your credit history. However, bankruptcy will stay on your credit report for 10 years. For that period of time, any lender viewing your credit report will see an indication that you filed for bankruptcy and may take that into consideration before extending a line of credit. If you become more financially healthy in the seventh year, for example, it will have less of an impact than the first or third year of bankruptcy.
Your credit requires a lifetime of maintenance, and while bankruptcy is a major roadblock, worry less about a timetable and more about weathering the financial storm by relying less on credit cards and survive by living a debt-free lifestyle.