Depending on your financial situation, bankruptcy may be your only option to find some relief from your overwhelming debts, but it will affect your credit for a lot of time. Although it may help you get rid of your financial commitments and reorganize your debt, this legal proceeding will be listed on your credit reports for up to 10 years. Healthier credits are usually hit much harder than poor ones. However, if you follow the right steps, there’s a chance to gradually heal your credit over time.
The first thing you need to know is that there are several different types of bankruptcy. Knowing which one to file for beforehand is particularly important. Some lenders may, in fact, view one type more favorably than the other. You should always consult a skilled attorney before filing for bankruptcy to minimize its impact on your credit report. In particular:
Chapter 7 bankruptcy
Chapter 7 bankruptcy allows you to sell your nonexempt property through a neutral third party (the trustee) to forgive some of all your debts, over the course of up to 6 months. You can still keep your exempt property such as your furniture, car, or clothes, though. Chapter 7 bankruptcy stays on your report for 10 years.
Chapter 13 bankruptcy
If you want to keep your property, Chapter 13 allows you to pay back your debt over a period of 3-5 years. To qualify for this type of bankruptcy, you must have a regular income from which some money will be drawn each month. Chapter 13 bankruptcy stays on your report for 7 years, but if some conditions are not met, it can remain for up to 10 years.
Including accounts in bankruptcy filing
Whenever you include an account in your bankruptcy filing (such as medical or credit card bills), they will be reported on your credit report as discharged. The balance will be zero, but even if owed nothing for them, they will negatively affect your report no matter what. A lender will see them all when your report is checked, but the good news is that they won’t be reported as “past due” anymore. To maximize your chances to heal your report, you must use your credit responsibly for the time being.
However, you should check your report every now and then for errors – you must be sure that all negative marks are removed as quickly as possible! In the meanwhile, take out a line of credit you know you can afford, and start building credit by paying back debt regularly and responsibly. This way you will slowly repair all damage caused by your bankruptcy.