Bankruptcy Law: How Do I Rebuild After a Major Financial Loss?

In 2020 alone, more than half a million Americans file for bankruptcy to achieve debt relief.

This number is in light of the eviction moratoriums, stimulus checks, and other assistance programs provided by state and federal governments throughout the COVID-19 pandemic. In 2019, nearly 775,000 Americans filed such cases.

Bankruptcy law is complex, with each situation posing unique circumstances that must be carefully considered. But with so many people turning to this option, it’s imperative that you understand the stipulations of these cases, and how they could potentially affect your own finances.

Read on below to learn how bankruptcy works, and the best path ahead to rebuild following these filings.

What Is Bankruptcy?

In the United States, bankruptcy is a legal proceeding in which individuals or businesses declare their inability to repay debts. The actual ramifications following such a filing will depend on which chapter you file under, and the unique circumstances of your situation.

In some cases, debts are completely cleared. In other cases, they are minimized or restructured, with a payment plan put in place by the court. Either way—this is considered a negative credit event, that can play a heavy hand in determining your eligibility to borrow money in future situations.

Bankruptcy cases are filed under “chapters.” This refers to what section of the US Bankruptcy Code applies to your case.

Generally speaking, they are:

  • Chapter 7 Bankruptcy – what most people will file under in typical consumer situations, also known as liquidation bankruptcy in which assets are sold to repay creditors
  • Chapter 9 Bankruptcy – bankruptcy for municipalities (cities, towns, school districts, etc.)
  • Chapter 11 Bankruptcy – reorganization bankruptcy for either individuals or businesses, where assets and operations generally remain in the control of the debtor
  • Chapter 12 Bankruptcy –bankruptcy for family farmers and fishermen, where a payment plan is installed
  • Chapter 13 Bankruptcy – another form of consumer bankruptcy, where a payment plan is installed for consumers who have a regular income
  • Chapter 15 Bankruptcy – international bankruptcy cases

Overall, most consumer bankruptcy cases will fall under Chapter 7 or Chapter 13.

Rebuilding After Bankruptcy

While it’s true each type of bankruptcy filing carries its own set of repercussions, each filing can pose a serious risk of negatively impacting your credit and finances. This information remains on your credit report for years and can have a heavy impact in determining creditworthiness for future loans or credit lines.

For this reason, it is critical that consumers who have turned to this option understand the applicable bankruptcy law. Furthermore, they should begin to rebuild credit as soon as possible.

Check out the below tips for important suggestions to begin implementing immediately.

1. Stay on Top of Your Credit Report and Score

As you begin the journey of rebuilding credit following a bankruptcy case, you should definitely familiarize yourself with your credit report. This includes all pertinent information provided, as well as the number calculated by the credit bureaus.

These can be obtained for free online once per year, and more frequently for a small fee. Throughout the COVID-19 pandemic, consumers can access these weekly at no charge.

By thoroughly analyzing and tracking changes on your credit report, you can gain greater insight into what contributes to your score and overall profile as a borrower. You can also find inconsistencies or inaccuracies on your report and have them quickly corrected—ensuring your profile is as up-to-date as possible.

Furthermore, you can work to correct any other negative remarks on your report that may be bringing this score down. Bankruptcy typically causes an initial score decline of 100-200 points or more. However, the weight of this negative event lessens over time.

Another important reason to monitor your credit report and score is for potential fraud issues. Catching red flags early is one of the best ways to minimize potential damage from these types of situations.

Plus—watching your score climb back up is a great way to remain motivated and dedicated to rebuilding following a bankruptcy case!

2. Implement and Maintain Responsible Credit Habits

Following a bankruptcy case, you will likely struggle for a few years to prove creditworthiness to potential lenders.

In order to rebuild your profile and prove that you can maintain responsible credit habits, you must be patient—this process will take time. But there are a few key steps you can implement to help speed up the rebuilding process.

To start, be sure to pay all bills on time consistently. As your payment history makes up a large chunk of your credit score, this can go a long way in improving your profile.

Another way to boost your score is to keep credit utilization low. Not only will this help move your score up, but it will prevent you from risky behaviors that may have contributed to your bankruptcy situation in the first place. Plus—paying off balances in full each month saves from high-interest charges.

Finally, it’s a good idea to stack up an emergency savings fund that could sustain you for a few months, if necessary. This provides a cushion, should an emergent situation comes up that may otherwise leave you turning to costly credit cards or cash advances.

3. Consult With an Expert

For help in navigating the confusing waters of bankruptcy law, and ensuring you are making the best possible decisions for your situation, it’s a good idea to consult an expert.

An attorney that specializes in bankruptcy law and fair credit reporting laws can use their skills and experience to help guide you during this time. Click here for more on how these lawyers may make or break your case.

Educate Yourself on Bankruptcy Law

With this guide, hopefully, you can walk away with a greater understanding of the underpinnings of bankruptcy law. But again—each situation is unique and carries its own set of potential repercussions to consider.

For this reason, it is important to consult an expert in the field. An attorney experienced in the field of bankruptcy and fair credit reporting can provide well-qualified advice and guide you down a tricky time.

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