Under Chapter 7 bankruptcy, the trustee gathers and sells non-exempt assets and uses all the proceeds to pay creditors in accordance with the Bankruptcy Code. Some assets may be pledged to certain creditors, as in the case of a mortgage. The debtor will be allowed to keep certain assets, exempt by the court. Filing for bankruptcy under Chapter 7 may result in the loss of property.
Individuals, partnerships, corporations and other business entities are all eligible for bankruptcy under Chapter 7, and relief is available whether the debtor is solvent or not and regardless of the sum of their debts. However, if in the preceding 180 days a prior bankruptcy petition was dismissed due to willful failure to appear before the court, failure to comply with court orders, or if the debtor voluntarily dismissed the prior case after creditors sought to recover property upon which they hold liens, an individual may not file for bankruptcy under Chapter 7 or any other chapter. The individual must have also received credit counseling from an approved counseling agency, either an individual or a group briefing, within 180 days prior to filing the petition.
It’s also important to note the time requirements between bankruptcies. The must be 8 years between two Chapter 7 filings, 3 years between two Chapter 13 filings, 4 years for Chapter 7 after a Chapter 13 filing, and 6 years for Chapter 13 after a Chapter 7 filing.
What if I need a loan or credit card immediately after bankruptcy?
Unfortunately, bankruptcy does have an effect on your credit score. Typically credit scores drop about 100 to 150 points. Under Chapter 7, a bankruptcy filing can stay on your credit report for up to ten years. This makes you a risky borrower, which makes it more difficult to receive credit. However, you do have a few alternatives.
Directly after filing, you may not qualify for conventional credit cards or loans, but there are some options designed for people with low credit scores. With that said, creditors may charge higher interest rates and fees to offset the risk.
Monitor your credit score
Financial institutions base their decisions regarding your applications either directly or indirectly on your credit score, so monitoring your credit score can not only help you understand your current credit position, but can also help you be aware of what lenders may see when reviewing your applications. It can also help detect any inaccurate information which could impact your score. All in all, it’s vital information for your financial well-being. The more often you check your credit score the better, and you should do it at least once a year. There are a few ways to do so for free that can be easily accessed online. Make sure you do it from a secure website and read the fine print.
Get a Secured Credit Card
Secured credit cards are a great way to build or improve your credit score. Most credit cards have no collateral to back the borrowers debt, which is why rates tend to be high. With a secured credit card, your limit is dictated by a cash deposit, which can then be drawn from by the issuer of the card to cover your debt in case you fail to make payments, significantly lowering the risk for the issuer.
It’s an expensive way to access credit, but considering that people with low credit scores wouldn’t qualify for low interest rates, it can still be less expensive than a regular credit card.
To rebuild credit with a secured credit card, use a small percentage of your credit line each month and pay it off when your statement arrives. This will give you a history of using credit in moderation and consistently paying it off.
Utilize a Co-signer
If you are unable to access credit on your own due to a poor or lack of credit history, you may want to consider a co-signer. A lender can then look at their score as a guarantee of payment since, if you’re unable to make the payments, the co-signer will be liable for them.
Since activity on the loan in question affects both of your credit scores, either positively or negatively, people generally choose to ask family and friends to be co-signers.
Consider a Credit-builder Loan
This is also a good way of improving or building your credit score. They don’t require good credit for approval, but they do require that your income is sufficient to cover payments. By showing that you are able to handle consistent payments on a certain amount, your credit score improves.
These are typically offered by smaller financial institutions and work by holding the amount borrowed until the loan has been paid off, allowing you to build both your credit score and your savings. Credit-builder loans also provide a safety net for the lender as it offsets the risk involved.
Ask to become an authorized user of another credit card
Another great option to rebuild your credit score is becoming an authorized user of a credit card belonging to someone with a better score, maybe a family member or a trusted friend. They don’t have to actually give you a card, nor do you have to make any charges to it, but the simple association of your name to their credit will improve your score.
Make sure you ask someone who can be trusted to pay their credit card bill on time, and preferably in full. The less they use the card in question, the better, preferably under 30% of their credit limit.
How long does it take to rebuild your credit after bankruptcy?
If you start working on improving your credit score right after filing for bankruptcy, and if you take the right steps, it is possible to improve a poor credit score (less than 579) to a fair one (from 580 to 669) over 12 to 18 months. Most people who work to improve their credit score will see improvement after a year.
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