Bankruptcy offers debt relief, but the Federal Trade Commission (FTC) website warns that it is a drastic action in terms of your credit rating. It stays on your Experian, Equifax and TransUnion credit bureau records for a long time, so you must work hard to undo the damage through several years of credit rebuilding.
Time Frame
Consumers file either Chapter 7 or Chapter 13 bankruptcy, the FTC website explains. Chapter 7 requires liquidation of virtually all assets and wipes out most of your bills. Chapter 13 lets you keep some property but requires you to repay certain bills through a court-ordered plan that takes about three to five years to complete. Both bankruptcy types are reported in your credit bureau records for 10 years before being automatically erased.
Considerations
You are not limited in the number of times you can declare bankruptcy in your lifetime, but you are subject to waiting periods. The FTC website advises that at least eight years must elapse between Chapter 7 filings, while you only have to wait two years to repeat a Chapter 13 bankruptcy. Each case stays on your credit report for a decade, and more than one bankruptcy hurts your credit rating severely because it shows a pattern of debt mismanagement.
Credit Repair
Post-bankruptcy credit repair requires careful financial management. Lenders need to see that you will pay bills reliably before they extend more credit to someone with bankruptcy on their reports. MSN Money website columnist Liz Pulliam Weston explains that you can use a secured credit card to build good payment records. Banks give you these cards in exchange for a security deposit. Regular use and prompt payment of the secured card repairs your damaged credit. The bank will convert the card to a regular revolving account within 12 to 18 months, and you should be able to get new accounts on the strength of your good record.
Alternatives
Most bad credit items do not stay on your credit reports as long as bankruptcies. Delinquent payments, defaulted loans and accounts, foreclosed homes, court judgments and repossessed cars all get wiped out in seven years. The FTC recommends exploring alternatives like preparing your own budget or having credit counseling sessions before making a final decision on bankruptcy. You are legally required to go through counseling with a government-approved provider before your bankruptcy case can proceed, and debt management counseling is mandatory before your case is officially closed, the FTC advises.
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