Repairing Credit After Filing For Chapter 7 Bankruptcy Protection
A large number of people file bankruptcy each year. According to data collected by the bankruptcy court system in the United States, in the twelve month period between June 30, 2008 and June 30, 2009, 1,250,205 people filed for personal bankruptcy protection. As that period included the 2008 financial meltdown, this figure is not surprising. Hundreds of thousands of people suddenly found their savings and retirement accounts wiped out due to tremendous losses. Consequently, many people filed for bankruptcy due to the fact that their debts now outweighed their assets. In other words, they found themselves in true debt, since they had a negative net worth.
For personal bankruptcy, Chapter 7 and Chapter 13 of Title 11 of the United States Code provide for protection against creditors in the event of a debtor's inability to repay their debts. Chapter 7 liquidates all non-exempt assets to repay creditors to the extent of the value of those assets and discharges all remaining debt. Chapter 13 halts all collection attempts and allows the debtor to set up a repayment plan on the debtor's terms that the creditors must accept. Since Chapter 7 is simpler and discharges all eligible debt, it is much more attractive to debtors than Chapter 13.
Needless to say, Chapter 7 bankruptcy protection wipes out the debtor's credit rating. After the bankruptcy proceedings are complete, the debtor's first order of business must be to take steps to repair their credit rating. There are multiple ways to accomplish this, and all of them take some time. There is no way the debtor will be able to establish a good credit rating for a few years, usually at least two. The bankruptcy stays on the debtor's credit report for at least ten years after it was filed.
The good news is that filing for bankruptcy can actually help a debtor raise their credit score over the long term. This is due to the way that the Fair Isaac Corporation, or FICO, calculates credit scores. To be sure, punctual debt repayment counts for thirty-five percent of a debtor's credit score, but an additional thirty percent is the amount of money owed. The larger this amount, the worse off the credit score becomes. Therefore, filing for bankruptcy to get rid of excess debt can help raise the debtor's credit score because it reduces the amount of debt the debtor is liable for.
Removing credit report errors is also a good way to repair a credit score. After a bankruptcy, a debtor's credit report will likely list accounts that were supposed to have been closed by the bankruptcy as still being open. It is the debtor's responsibility to contact the credit bureaus and have them rectify any errors that exist on the credit report. The quickest way to start repairing a damaged credit report is to get a secured credit card and only stick to using a small percentage of the balance each month and paying off that balance in full. This will slowly move the debtor's score up.
