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Understanding Bankruptcy Discharge and Rebuilding Your Credit

Filing for bankruptcy can be a daunting process, but it can also provide a fresh start for those overwhelmed by debt. In this comprehensive guide, we will explore how bankruptcy discharge works, what debts can and cannot be discharged, and how you can rebuild your credit after bankruptcy. If you need expert mortgage services, don’t hesitate to contact O1ne Mortgage at 213-732-3074.

How Does a Bankruptcy Discharge Work?

Bankruptcy is a legal process designed to help individuals who are unable to repay their debts. When you file for bankruptcy and meet the court’s requirements, certain debts will be discharged, meaning you are no longer legally obligated to repay them. Creditors are also prohibited from attempting to collect these discharged debts.

There are two main types of bankruptcy for individuals: Chapter 7 and Chapter 13.

Chapter 7 Bankruptcy

Chapter 7, also known as liquidation bankruptcy, requires you to pass a means test to demonstrate that your income is below the median for your state. You must forfeit any non-exempt property, which will be sold by a court-appointed trustee to repay your creditors. The process typically takes four to six months, after which any remaining eligible debts are discharged.

Chapter 13 Bankruptcy

Chapter 13 bankruptcy is for individuals with sufficient income to repay their debts over time. A repayment plan is established, lasting three to five years, during which you make regular payments to a bankruptcy trustee. At the end of the repayment period, any remaining eligible debts are discharged.

What Debts Can Be Discharged?

Most consumer debts can be discharged through bankruptcy, including:

• Unpaid balances on credit card accounts, personal loans, and most other unsecured debt
• Medical bills
• Loans from family or friends
• Outstanding utility bills
• Attorney fees
• Contractual debts
• Civil court judgments
• Missed rent payments
• Certain unpaid taxes

In Chapter 13 bankruptcy, additional debts such as unpaid restitution or damages awarded in a civil case, debts for money or property obtained by false pretenses, and debts for fraud or misappropriation of funds while acting in a fiduciary capacity can also be discharged unless a creditor successfully petitions the court to have them declared nondischargeable.

What Debts Can’t Be Discharged?

Some debts cannot be discharged through bankruptcy, including:

• Unpaid alimony and child support
• Certain taxes
• Federal student loans
• Debts for death or personal injury caused by the debtor’s operation of a motor vehicle while intoxicated or impaired

Additional nondischargeable debts under Chapter 7 include debts for willful and malicious injury to another entity or property, and certain criminal restitution orders. Under Chapter 13, additional nondischargeable debts include debts for restitution or a criminal fine as part of a criminal conviction, debts for willful and malicious injury to property, debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or marital separation.

What Happens After a Bankruptcy Discharge?

Once the bankruptcy court issues a discharge order, you, your lawyer, and all creditors whose debts have been discharged will be notified. Creditors are no longer allowed to contact you seeking payment on discharged debts. If they do, you can file a court motion for sanctions against them.

Your credit reports should be updated within a few months to reflect zero balances on discharged accounts. However, creditors who issued secured debt, such as mortgage issuers and auto finance lenders, may still have the right to seize collateral if you default on the loan agreement.

If you wish to keep certain property, consider reaffirming those debts before the discharge is finalized. Reaffirming your debt means you promise to repay it in exchange for keeping the property.

How a Bankruptcy Discharge Affects Credit

While a bankruptcy discharge itself doesn’t affect your credit, the act of filing for bankruptcy has a significant impact. A Chapter 13 bankruptcy appears on your credit report for up to seven years, while a Chapter 7 bankruptcy appears for up to 10 years. Bankruptcy is one of the most severe negative events that can appear on your credit report, and it will hurt your credit scores until it expires.

The impact of bankruptcy on your credit scores will diminish over time, but some lenders may refuse to work with applicants who have a bankruptcy on their credit report, regardless of their credit scores.

How to Improve Your Credit After Bankruptcy

Rebuilding your credit after bankruptcy is possible, and you can start as soon as you file. Here are some steps to help you improve your credit:

Pay Your Bills on Time

Commit to paying your bills on time, as payment history is the most important factor affecting credit scores. Regular on-time payments for loans, credit cards, and other debts will help build strong credit scores.

Get a Secured Credit Card

Secured credit cards require a cash deposit, which serves as the card’s borrowing limit. Using the card regularly and paying your bills on time each month can promote credit score improvement.

Consider a Credit-Builder Loan

Credit-builder loans are designed to help you save money while improving your credit. The loan amount is placed in an interest-bearing savings account, and you make regular payments. If you make all payments as agreed, you’ll build a positive payment history and receive the money (plus interest) when the loan is repaid in full.

Avoid Repeating Past Missteps

Review the decisions that led to bankruptcy and commit to adopting new habits to avoid getting in over your head again. Consider seeking guidance from a certified credit counselor.

The Bottom Line

Pursuing bankruptcy is never an easy decision, but a bankruptcy discharge can be a great starting point for rebuilding your credit. Three to six months after receiving a discharge, check your credit reports to ensure discharged accounts are updated accurately. If not, dispute the inaccuracies to have them corrected. Monitoring your FICO® Score from Experian can help you track your progress as you work towards healthy credit.

If you need expert mortgage services, contact O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your financial journey and achieve your homeownership goals.

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