The Chapter 7 Discharge
A discharge releases individual debtors from personal liability for most debts and prevents the creditors owed those debts from taking any collection actions against the debtor. Because a chapter 7 discharge is subject to many exceptions, debtors should consult competent legal counsel before filing to discuss the scope of the discharge. Generally, excluding cases that are dismissed or converted, individual debtors receive a discharge in more than 99 percent of chapter 7 cases. In most cases, unless a party in interest files a complaint objecting to the discharge or a motion to extend the time to object, the bankruptcy court will issue a discharge order relatively early in the case generally, 60 to 90 days after the date first set for the meeting of creditors. Fed. R. Bankr. P. 4004.
The grounds for denying an individual debtor a discharge in a chapter 7 case are narrow and are construed against the moving party. Among other reasons, the court may deny the debtor a discharge if it finds that the debtor: failed to keep or produce adequate books or financial records failed to explain satisfactorily any loss of assets committed a bankruptcy crime such as perjury failed to obey a lawful order of the bankruptcy court fraudulently transferred, concealed, or destroyed property that would have become property of the estate or failed to complete an approved instructional course concerning financial management. 11 U.S.C. § 727 Fed. R. Bankr. P. 4005.
Respond To Lender Inquiries
Once you submit your preapproval application, the rest is in your lenders hands. Your lender will review your income, assets, debt and credit to see if you qualify for a mortgage. If you seem like a good candidate, your lender will send you a preapproval letter. You can use your letter to start shopping for a home.
Your lender might need to contact you to ask questions about items on your credit report. This is especially common after an adverse financial event like bankruptcy. Be honest and respond to your lenders inquiries quickly to improve your chances of approval.
What To Do After Chapter 7 Bankruptcy
Push the re-start button on your financial life.
Thats the first thing anyone should do after having debts discharged in Chapter 7 bankruptcy. Hopefully, that re-start button includes a plan for reduced spending and paying all bills on time.
The easiest way to do that is to draw up a budget that realistically accounts for your income and expenses.
If youre not good at that, call a nonprofit credit counseling agency and get some free assistance from their professional certified counselors. Helping consumers come up with an affordable monthly budget is their specialty.
They can give you the benefit of their training and experience at drawing up monthly budgets, plus tips on how to make the bottom line come out in your favor every month.
If you get in the habit of paying bills on time, you will begin to , and youll regain favor with lenders and credit card companies. A few years of good practice and you and your creditors will forget this ever happened.
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Will A Bankruptcy Ruin Your Credit Forever
No, a bankruptcy will not ruin your credit forever. When you first file for bankruptcy your credit score will take the biggest hit. As the bankruptcy ages, your credit score will improve so long as you responsibly borrow and make timely payments. Also, a bankruptcy only remains on your credit report for 10 years. After the 10 year period, the bankruptcy will be removed and your credit score will increase.
When Is Chapter 7 Bankruptcy Removed From Your Credit Report
Chapter 7 bankruptcy is the most common and simplest type of bankruptcy protection for individuals. It is often referred to as liquidation bankruptcy, which means that assets are often sold to pay secured debt to creditors. Chapter 7 is also sometimes used by small businesses. After liquidating assets to pay secured debt, most or all of your unsecured debt is discharged. This includes credit cards, personal loans, department store credit, and other similar debt. Student loans, alimony and child support typically cannot be eliminated through bankruptcy.
Typically, a Chapter 7 bankruptcy can be completed within a few months. After your bankruptcy hearing, the Chapter 7 is then discharged. This bankruptcy will stay on your credit record up to 10 years from the date of bankruptcy filing.
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You Can Improve Your Credit After Bankruptcy
Dont give up after youve filed for bankruptcyyou can improve your credit score. But be patient, because it could take some time. If you want a little extra help, sign up for our free , or consider ExtraCredit. Restore It, a feature on ExtraCredit, gives you an exclusive discount to one of the leaders in credit repair. They can help you work to get your score where you want it to be after youve filed for bankruptcy.
Consider The Cons Of Double Filing
If you file too soon, you cannot legally have another debt discharge until the time limits have passed, so the process could waste your time and money.
Furthermore, if a judge finds that you have filed again “in bad faith,” they will stop your automatic stay , unless you can provide clear and convincing evidence that you filed in good faith. They might even throw your case out.
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Do You Qualify For Chapter 7 Bankruptcy
To qualify for Chapter 7 bankruptcy you:
Must pass the means test, which looks at your income, assets and expenses.
Cannot have filed a bankruptcy petition in the previous 180 days that was dismissed because you failed to appear in court or comply with court orders, or you voluntarily dismissed your own filing because creditors sought court relief to recover property they had a lien on.
Will A High Credit Score Help You During A Bankruptcy
Myth: A clean credit historyone with no late payments or other issuesand a high credit score means youll be less impacted by a bankruptcy.
The truth: Bankruptcy will have a huge negative impact on your credit, and a previously positive payment history doesnt change that. In fact, if you have a higher score, you could stand to lose more than if you already have a low score.
A bankruptcy also temporarily wipes out all the goodwill you might have developed with your timely payments. Some lenders may have rules about offering credit when a recent bankruptcy shows up on your credit historyno matter how good your score used to be.
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How Are Delinquent Accounts Reported On Credit Reports
People who file for either type of bankruptcy may have accounts which have been delinquent for several months or even longer. The individual delinquent accounts are deleted seven years from the original delinquency date.
The delinquency date is the date the account first became delinquent. Filing for either kind of bankruptcy does not alter the original delinquency date nor does it extend the time the account remains on the credit report.
In most instances, since the account was delinquent before it was included in the Chapter 7 or Chapter 13 bankruptcy, it is likely to be deleted before the bankruptcy public record.
Bankruptcy Reporting On A Credit Report
Most negative entries, like slow payments and charge offs, will disappear from your report after seven years. It works a bit differently for bankruptcy filings and depends on the particular chapter.
- Chapter 7 bankruptcy. The fact that you filed a Chapter 7 bankruptcy will stay on your credit report for up to ten years. At the ten year mark, the credit bureaus should stop reporting the bankruptcy.
- Chapter 13 bankruptcy. In this chapter, the filer pays into a repayment plan for three to five years. The Chapter 13 bankruptcy filing appears on a credit report for seven years from the filing date, which is only two years beyond the longest repayment plan. This benefit serves as an incentive to filers to choose the repayment option and to repay creditors something over time.
The immediate effect of bankruptcy on your credit score will depend on whether you initially had a high or a low score, and, in most cases, a higher initial score will take a bigger hit. The exact effect is hard to predict because scoring companies keep the formulas used to calculate scores somewhat secret. However, if you’re diligent, it’s not impossible for you to reach a credit score in the 700s just two or three years after you file your Chapter 7 matter.
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Here’s How Bankruptcies Impact Your Credit Score
While bankruptcies on your credit report will always get factored into your credit score for as long as they are on there, the impact on your score lessens with each year that passes. So, you may see a dramatic drop in your score in the first month immediately following your bankruptcy filing, but by the end of the first year it could have less weight, and certainly less in later years compared to year one.
Your own credit profile will also play a part in how much your credit score is affected when you declare bankruptcy. Similar to how having a higher credit score can ding your more points if you miss a credit card payment, so, too, is the case if you file for bankruptcy. According to FICO, someone with good credit may experience a bigger drop in their score when a bankruptcy appears on their report than someone with an already poor credit score.
Estimates we found online from places like Debt.org show how people with different credit scores would be impacted by a bankruptcy filing. Someone with a credit score of 780 or above would be dinged between 200 and 240 points, while someone with a 680 score would lose 130 to 150 points.
Whatever the case, no one really benefits from filing for bankruptcy. It’s an option of last resort that sometimes even those with good credit find themselves making.
How To Improve Your Chances
To get approved for a mortgage after bankruptcy, you need to demonstrate to lenders that you can manage your finances responsibly.
That will require establishing good credit habits and ensuring that youre not overutilizing credit, says Puricelli.
To rebuild your credit more quickly, follow these tips provided by Graham:
- Pay all your bills on time and in full
- Check your credit score and three free credit reports often and dispute anything inaccurate
- Dont take on unsecured debt, like personal loans or credit cards, which will most likely come with high interest rates
- Get a secure line of credit or loan that is backed with a deposit you pay beforehand
Having a friend or relative cosign on new credit lines can also help you qualify more easily and start building new credit.
But this strategy comes with a lot of risk, because the cosigner is agreeing to take over your new debts if you cant pay them. And if the loan goes bad, their credit will take a hit, too.
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Stay On Top Of Payments
Unfortunately, people wont be as quick to trust you after a bankruptcy. It could be a while before youre back on your feet. But the best way to prove you wont end up in the hole again is by managing your money better. Go ahead and get yourself on a budget. When you give every dollar a job and focus on being more intentional with your money, you make it easier to pay your bills on time and stop overspending. Staying on top of payments, along with having a steady income, is one of the best things you can do for your credit after a bankruptcy because it shows youre trying to be more responsible with your money.
And if you still have debts that werent erased in a bankruptcylike student loans, government debt, reaffirmed debt , child support or alimonyknock those out as soon as possible with the debt snowball method. Or try settling your leftover debts to get them out of your life as soon as possible.
Bankruptcy Affects High Credit Scores More Than Low Credit Scores
|Note: Scores do not go lower than 300||130-150 points|
You will likely drop to a poor credit score no matter what score you started with. Your credit history already shows you filed for bankruptcy, but credit bureaus want to ensure you take steps to improve your bad credit before you take on more debt and new credit.
The sliding scale system will generally knock your credit points however much it takes to show you have poor credit. Your score may barely change if you already have bad credit . It is not common to see credit scores lower than 500 even after a bankruptcy filing.
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Reasons To Switch Your Bankruptcy Filing From The Previous Chapter
The type of bankruptcy you file will change your repayment plan, the amount of unsecured debts you owe, and the amount of time the bankruptcy stays on your record. It may make sense to file for a different bankruptcy than you used in your previous case.
A bankruptcy attorney can help you understand the best debt relief options for you. An attorney can’t change the time limits between filing dates, but they can help you decide if switching your Chapter is a smart idea. They can also help you prepare to file as soon as the date is available to you.
You can apply one of these strategies to your second bankruptcy filing:
- Switching from Chapter 7 to Chapter 13: If you pay off unsecured debts during Chapter 7, you can file a Chapter 13 to create a repayment plan to pay off tax debt or other debts that were not discharged during the Chapter 7 filing.
- Switching from Chapter 13 to Chapter 7: If you pay back 100% of unsecured debt to creditors, the six-year waiting period can be waived. In some cases, you only need to pay back 70% of unsecured debt. The first bankruptcy case needs to be in good faith in order to file for Chapter 7.
- Repeating Chapter 13 bankruptcy filing: Some people may repeat Chapter 13 filing to manage student loans or tax debts repayment. These debts cannot be discharged, so they must eventually be paid in full.
Whats The Difference Between Chapter 7 And Chapter 13 Bankruptcy
The major difference is time Chapter 7 takes 4-6 months Chapter 13 takes 3-5 years and money. You can have most, or all your unsecured debt discharged in Chapter 7 bankruptcy. In Chapter 13, some of your debt is forgiven, but only if you meet the conditions approved by the trustee and bankruptcy judge.
Accounts Included In The Bankruptcy
After youve filed for bankruptcy, the accounts included in your bankruptcy will show up as included in bankruptcy on your credit report. Most of them will remain on your credit report for seven years. These include accounts like charge offs, collections, repossessions, and judgments. They can also potentially be removed from your credit report before the reporting limit of seven years.
How Long Does A Chapter 7 Bankruptcy Stay On Your Credit Report
After you file for a Chapter 7 bankruptcy, it remains on your for up to ten years and youre allowed to discharge some or all of your debts. When you discharge your debts, a lender cant collect the debt and youre no longer responsible for repaying it.
If a discharged debt was reported as delinquent before you filed for bankruptcy, it will fall off of your credit report seven years from the date of delinquency. However, if a debt wasnt reported delinquent before you filed for bankruptcy, it will be removed seven years from the date you filed.
How Long Do Bankruptcies Stay On Your Credit Report
The length of time that a bankruptcy filing stays on your credit report depends on what type of bankruptcy you filed. We took a look at Chapter 7 and Chapter 13, which are the two main types of consumer bankruptcies, and to see how their impacts on your credit score differ.
- Chapter 7 bankruptcy: Also known as liquidation bankruptcy, Chapter 7 is what Harrison refers to as “straight bankruptcy.” It’s the most common form of consumer bankruptcy and is usually completed within three to six months. Those who file for Chapter 7 will no longer be required to pay back any unsecured debt , like personal loans, credit cards and medical expenses, but they may have to sell some of their assets to settle secured loans. Chapter 7 bankruptcies stay on consumers’ credit reports for 10 years from their filing date.
- Chapter 13 bankruptcy: Harrison refers to Chapter 13 as the “wage earner’s bankruptcy.” This form of filing offers a payment plan for those who have the income to repay their debts, just not necessarily on time. About a third of bankruptcies filed are Chapter 13 . Those who file are still required to pay back their debts, but instead over a three-to-five year time frame. Chapter 13 bankruptcies stay on consumers’ credit reports for seven years from their filing date.