Chapter 7 Bankruptcy & Recovery

by Heather Frances J.D. Google
It takes time for a debtor's credit report to recover after bankruptcy.

It takes time for a debtor's credit report to recover after bankruptcy.

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Chapter 7 bankruptcy, like other types of bankruptcy, gives debtors the chance to start over with a financial clean slate. However, remnants of bankruptcy remain on a debtor's credit record for years after the case has been completed, making it difficult to obtain new credit. But with time and effort, a debtor can repair his credit history and recover from the damage done by his bankruptcy case.

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Chapter 7 Bankruptcy

Often, chapter 7 bankruptcy is called liquidation bankruptcy because the debtor's nonexempt assets are sold by a court-appointed trustee to pay his debts. Since many assets are exempt by federal or state laws from being sold, Chapter 7 debtors may not have to forfeit any of their assets, even after filing for bankruptcy. Whether or not the debtor has any assets subject to sale, many of his unpaid debts are discharged, or erased, through the bankruptcy proceeding. Thus, most debtors exit Chapter 7 bankruptcy with most of their assets, but far fewer debts. Records of the debtor's bankruptcy remain on his credit record, however, and can inhibit his ability to obtain new credit.

Credit Cards

One way for debtors to begin rebuilding their credit is to obtain new credit cards and to regularly make payments. Over time, this establishes a positive payment record, which can improve the debtor's credit score. A debtor may have difficulty obtaining a credit card because of his bankruptcy history, so secured credit cards or retail store cards can be a good option. Secured credit cards, or prepaid cards, allow a debtor to deposit money onto the card and then use it like a normal credit card. Retail stores that offer their own credit cards may have more relaxed credit standards, allowing the debtor to qualify for a store card before being approved for other types of credit cards.

Correct Credit Report

Though bankruptcy itself can hurt a debtor's credit report, errors on the report can also hurt. Every debtor can obtain a free copy of his credit report and check it for mistakes. For example, a creditor might have erroneously reported that the debtor had not paid his debt when, in fact, the debtor had paid in full. Creditors might also incorrectly record the debtor's bankruptcy discharges, making it look like the debtor still owes money on those accounts. Fixing these errors can improve the debtor's credit score.

Continue Making Payments

Even after bankruptcy, you may still have ongoing payments to make on debts that were not discharged in bankruptcy. Making those payments on time can improve your credit score. For example, rental histories can be included in a credit profile, so the debtor can improve his credit report by making his rent payments on time. If the debtor creates a history of late payments after the bankruptcy case is complete, the credit report will suffer. If, on the other hand, his post-bankruptcy payment history shows improvement, the credit report can recover more quickly, allowing him to obtain credit sooner.