Life After Bankruptcy

1. How does the bankruptcy affect my credit rating?

Issuers of credit (like banks and credit card companies) are free to consider the fact of a bankruptcy filing in deciding whether to extend credit.  Credit reports may list bankruptcy filings for up to 10 years.  Some issuers of credit may decide to extend credit regardless of a bankruptcy.  Others may be willing to extend credit only after a number of years have passed, or until the bankruptcy filing is no longer on the credit report.

Some creditors will off you credit more freely than to other people in financial difficulty because you may not be able to file another bankruptcy for many years to come.  For the most part though, for obvious reasons, it is best for you to avoid incurring new debt as much as possible after bankruptcy.  Using debit or prepaid cards allows the convenience of not carrying and paying with cash, but without incurring any debt.

1. What can I do to reestablish my credit after filing bankruptcy?

In some jurisdictions there may be debtor education programs offered in connection with chapter 13 cases that can help you reestablish credit.  Where such programs are not available, you may be able to obtain a “secured” credit card, which requires that you deposit funds with the credit card issuer.  This provides the opportunity to show responsible use of credit, which is a major factor in any lender’s credit decisions.  Other major factors are length of employment and length of residency.

1. How can I obtain a copy of my credit report and correct any errors?

All persons are entitled to one free credit report per year, from each of the three approved credit agencies.  Additionally, whenever your application for credit is denied, the credit issuer is required to give you a copy of any credit report that was used in making the decision.

If there are errors in a report, such as an incorrect Social Security number or a debt that is not owed, you should make a request for correction in writing to the bureau, enclosing any copies of any documents that would establish the correct facts.

The advantages of bankruptcy

The key benefit of bankruptcy is the discharge of debts, which enables a debtor to start over with a clean slate.  However, there are many other advantages, including protection of property and an automatic stay.

Discharge of most debts
The principal goal of most bankruptcies is to have most unsecured debts discharged.  The bankruptcy discharge totally eliminates any personal obligation to pay many types of debts.  (A few types of debts are not dischargeable.  Also, if a creditor has a lien on property taken as collateral, the debt owed to that creditor may still have to be dealt with after bankruptcy because the lien will, in some cases, survive.)  For most debtors, bankruptcy is a relatively quick and easy way to end the creditor harassment, hardship, anxiety and marital stress normally associated with debt overload.

Protection of property and income from unsecured creditors
Bankruptcy is often the only sure way to protect a debtor’s property from unsecured creditors (those who did not take a lien on property as collateral at the time of the transaction).  Bankruptcy may provide total protection for a home, car or other vital property.

The amount of property that debtors can protect from creditors through exemptions in bankruptcy is, in many states, far greater than the amount that they can protect under the state law execution processes through which creditors attempt to seize debtors’ property or income.  Even where state execution exemptions are similar to or better than the federal bankruptcy exemptions or where the federal exemptions are not available, bankruptcy allows the debtor to avoid having to assert the exemptions repeatedly in response to the execution attempts of different creditors.

Normally, bankruptcy also serves to prevent any garnishment (attachments or seizure) of wages or other income after the petition is filed.  This, in turn, may protect an individual’s job if the employer does not favor multiple wage garnishments.  Even attempts to reduce Social Security or other public benefit payments to get back previous overpayments should be preventable by a timely bankruptcy petition.

Tools for eliminating or modifying secured debt
A bankruptcy discharge does not, by itself, eliminate the liens on a debtor’s property that secured creditors have obtained before bankruptcy.  However, other provisions in the Bankruptcy Code do give debtors mechanisms to deal with most secured creditors.  Many types of liens may be eliminated or reduced, either because they impair exemptions or because they are on property that is worth less than the liens.  In a chapter 13 case, payments on most other secured debts can be lowered, and a reasonable time can be gained to cure almost any defaulted secured debt.  Often, one or more of these aspects of bankruptcy enable a debtor to retain a home, car or furniture that would otherwise be lost.

Automatic stay
The most valuable feature of a bankruptcy is sometimes the automatic stay, which the debtor gains instantaneously on filing a petition.  The stay is an automatic court order that prohibits all sorts of collection attempts by creditors, allowing the bankruptcy to proceed in an orderly fashion.  It forces an abrupt halt of most creditor actions against the debtor, including repossessions, garnishments or attachments, utility shutoffs, foreclosures and evictions.  Many of these can thereafter be permanently prevented.  The stay is also an effective way (through hardly the only way) to end creditor collection efforts.  Creditors who violate the stay risk contempt of court, money damages and attorneys’ fees.  Beyond all this, the stay gives the debtor a breathing spell, time to sort things out.

Other protections available through bankruptcy
Bankruptcy may offer the only possible way for an individual to keep or regain a driver’s license that is subject to revocation because of an unpaid debt arising from a motor vehicle accident.  This, in turn, may mean employment and income for the individual’s family.  In some cases, bankruptcy may mean freedom for a debtor who might otherwise be incarcerated for failure to pay support obligations or as a result of a contempt proceeding involving some other debt.  The Bankruptcy Code also protects the debtor from many types of discriminatory actions by governmental bodies and private employers on the basis of unpaid debts discharged in bankruptcy.