Congratulations! You have received your bankruptcy discharge at the end of your Chapter 7 or Chapter 13 case. You are anxious to get a fresh start, but what should you do next? Here are a few steps you can take to rebuild your credit, ensure your financial future, and make sure you get the most from your new debt-free status.
YOUR BANKRUPTCY DOCUMENTS
Keep copies of your bankruptcy paperwork. It is important to keep copies of your bankruptcy petition, schedules, and order of discharge for your records. You can retrieve these documents from the court if you lose them. However, it may cost you and can be a bit of a hassle.
Why should I keep my paperwork? Although it does not happen every day, creditors have been known to try to collect on debts discharged in bankruptcy. If any creditors attempt to collect after your bankruptcy, you can beat them into submission with the discharge. Moreover, as we will discuss below, you may need your paperwork to correct any issues with your credit report.
How long should I keep my bankruptcy documents? I advise my clients to keep copies of their petition, schedules, discharge, and related documents with their permanent records. (I provide clients with PDFs, which they can store and print as necessary.) You may need a certified copy of the case documents if you are applying for a professional license in some states. In that case, you can obtain a certified copy from the court through Pacer for a fee.
CREDITOR HARASSMENT AFTER DISCHARGE
What if a creditor tries to collect on a debt discharged in my bankruptcy? If a creditor contacts you, inform the creditor that the debt has been discharged in bankruptcy and give them your case number. If the creditor continues to contact you, let your attorney know.
If a creditor or debt collector contacts you after your bankruptcy discharge to collect on a discharged debt, it is a serious violation of the Bankruptcy Code. Such action may also violate the federal Fair Debt Collection Practices Act (FDCPA), the Pennsylvania Fair Credit Extension Uniformity Act (PFCEUA), and other state and federal consumer protection laws. A creditor who attempts to collect a discharged debt can end up paying you.
What if I forgot to list a debt in my bankruptcy? In most instances in this district, if you unintentionally fail to list an unsecured debt in a no-asset Chapter 7 case, the debt is still discharged. You do not have to reopen the case to add the debt. However, if you leave out a debt secured by property (e.g., a car loan, mortgage, etc.), it may not be discharged.
Likewise, if you forget to list a debt in Chapter 13 or in a Chapter 7 case where the trustee sold some of your assets, the debt may not be discharged. Regardless, if you believe you forgot to list a debt, you should ask your attorney about it.
CREDIT REPORTING AFTER DISCHARGE
Keeping track of your credit is a crucial step in rebuilding your credit profile. Here are answers to some common questions about credit reporting after bankruptcy:
When should I check my credit report? Check your credit report about three months after you receive your bankruptcy discharge. (It takes a while for the credit-reporting agencies to update your report.) You can get a free copy of your report once a year from each of the three major credit bureaus at www.annualcreditreport.com.
When will the bankruptcy drop off my credit report? A Chapter 7 bankruptcy typically shows on your credit report for ten years from the date that your bankruptcy case was filed (not the date of discharge). A Chapter 13 bankruptcy should drop off your report seven years from the date you filed your case. However, the impact of the bankruptcy on your credit rating will diminish over time, even while it is still on your credit report, as long as you work on rebuilding your credit.
How should my discharged debts be listed on my credit report? Every debt discharged in your bankruptcy should be noted as “discharged in bankruptcy,” or something similar, with a balance of $0 unless the debt was reaffirmed. If a debt does not show as discharged in bankruptcy, you can dispute the listing by sending a copy of your discharge to the credit-reporting agency along with the schedule (D, E, or F) that lists the debt.
What if I did not reaffirm a secured loan but continue to pay it? Many debtors keep property secured by a loan (typically a house or car) and continue to make their loan payments after bankruptcy without reaffirming the debt. If you did not reaffirm the debt during the bankruptcy, it should be listed as discharged, even if you keep the property and continue to make payments on the loan. Post-bankruptcy payments and delinquencies on such debts will not show on your credit report.
Quick Note: There is no federal or Pennsylvania law or statute requiring a creditor to report to a credit bureau. However, if a creditor chooses to report, it must do accurately.
How will my reaffirmed debts be reported to the credit bureaus? In most bankruptcy cases, there are no reaffirmed debts. However, post-bankruptcy payments on a reaffirmed debt, whether on-on-time or late, should show on your credit report. The debt should be listed as if you had not filed for bankruptcy. Making these payments on time can help improve your credit rating, but any late payments will be listed on your report as well. (There are significant disadvantages to signing reaffirmation agreements, which you should discuss with your attorney.)
Quick Note — How do I know if I reaffirmed a debt? To reaffirm a debt, you must sign a reaffirmation agreement provided by the creditor, which is filed with the court and approved by the judge. If you are unsure if you reaffirmed a debt, ask your attorney. Reaffirmation agreements will be in your case file as well, which you can obtain from the court.
What if a creditor reports incorrect information on my credit report? If a creditor fails to report the discharged debt correctly or places any other false information on your credit report, it is a violation of the federal Fair Credit Reporting Act (FCRA). To sue under the FCRA, you must first dispute the debt with the credit bureaus. However, both the creditor and the credit bureaus could end up paying significant damages and your attorney’s fees, if the false information is not corrected. Speak to your attorney, if you find incorrect information on your credit report.
THREE STEPS TO REBUILDING YOUR CREDIT AFTER BANKRUPTCY
To start rebuilding your credit, you must (1) get any nondischargeable debts back on track; (2) start building a history of regular on-time monthly payments and responsible use of credit accounts; and (3) avoid taking on unnecessary debt.
(1) Making arrangements to pay any nondischargeable debts. If you have non-dischargeable debts, such as student loans or certain taxes, you will need to contact the creditor to make arrangements to pay them. If you do not arrange to pay these debts, the creditors can begin collection action and can report delinquencies on your credit report.
Nondischargeable student loans. As to student loans, you should receive a forbearance for the time you were in Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, the loans would have been paid the same as other unsecured creditors but would also continue to accumulate interest. In either case, you need to make arrangements to get these loans back on track after bankruptcy.
Fortunately, there are various programs to lessen the burden of federal student loan payments that are worth exploring to see whether you might qualify, including income-based repayment and occupation-related and public service loan forgiveness. Some private lenders have hardship programs of some kind. In any case, try to avoid deferments, as the accumulating interest may cause the debt to build to an unsustainable level.
Nondischargeable taxes. Regarding non-dischargeable income taxes, contact the IRS, state revenue department (e.g., the Pennsylvania Department of Revenue), or the local taxing authority to make payment arrangements. (The IRS will typically accept a monthly payment of around 2 percent of the total.) However, if you have a substantial tax debt, you may need the assistance of an attorney to work out a settlement. If you can pay off these tax debts in a lump sum at some point, you will likely save substantial interest and fees.
There are other nondischargeable debts, such as criminal fines and restitution, alimony, and child support. If you have any of these debts, be sure to consult your attorney.
Quick Note — Obtaining a correct tax statement after discharging taxes: If you discharged taxes in bankruptcy, and your tax statement does not reflect the amount discharged after a month or so, you might need to contact the taxing agency. (For details, see my blog post on discharging income tax in bankruptcy.)
(2) Using a secured credit card or small vehicle loan to help build a record of on-time payments.
(a) Secured credit cards. To begin rebuilding your credit, you may wish to obtain a secured credit card. A secured credit card uses money deposited in a bank account as collateral for the credit card. The creditor can take the money in the account only if you default. Some banks offering secured cards do not require a credit check, and it may be easier to obtain a card from them. However, be sure to shop around. Some secured card providers charge excessive fees and interest. Also, you should make sure the provider reports to all three credit reporting agencies (not all do).
It is important to use no more than twenty percent of your available credit on your secured card (or any credit card). Thus, if you have a limit of $500, avoid carrying a balance of more than $100 on the card at any one time. The purpose of this card is to rebuild your credit, so responsible use is essential. If you are a couple, it is a good idea to have a separate card for each of you.
Quick Note: A secured credit card is not the same thing as a prepaid credit card. Although very convenient, prepaid credit cards do nothing to improve your credit.
(b) Vehicle Loans. If you need a vehicle, a car loan is another way to rebuild credit. However, I do not suggest getting a car loan just to rebuild your credit. See below for information on obtaining a vehicle loan after bankruptcy.
(3) Avoid unnecessary post-bankruptcy debt. The main traps for post-discharge debtors are (1) the temptation to open too many credit accounts and (2) incurring too much debt.
Too many accounts: In some instances, post-bankruptcy loans and credit accounts may be available. However, I do not recommend obtaining multiple credit accounts after bankruptcy to try to improve your credit score. Some post-bankruptcy debtors believe that the more accounts they open, the faster they will rebuild their credit. That mindset is a recipe for disaster. With few exceptions, debt is not your friend. One or at the most two credit cards should be enough for anyone.
Keep in mind that each time you apply for credit, the inquiry reduces your score a bit. Moreover, if you have too many accounts, you may be tempted to over-utilize credit, which may severely damage your income-to-debt and debt-to-available-credit ratios (see below). The key to rebuilding your credit score is the responsible use of credit and living within your means.
How much is too much debt — Understanding the income-to-debt ratio and debt-to-available-credit ratio. One reason debtors often see their credit rating rise soon after bankruptcy is the reduced income-to-debt ratio. In other words, the amount of debt that they have compared to their income is now much lower. The income-to-debt ratio is a significant factor in credit scoring. Therefore, you want to keep this ratio low.
Just as important is the debt-to-available-credit ratio, which measures the percentage of debt you use compared to your available credit. Limiting your use of unsecured credit to less than twenty percent of each account’s available credit will show that you are a responsible user of credit. Maxing out credit is a sure way to damage your credit rating. Of course, I prefer to see clients pay off their credit cards each month and avoid revolving balances.
Quick Note — CREDIT REPAIR IS A SCAM. You may receive solicitations from “credit repair” companies. Credit repair is a scam, and the services they are selling are worthless. There is no quick fix when it comes to credit issues. But you can rebuild your credit systematically over time.
YOUR HOUSE AND OTHER REAL PROPERTY AFTER BANKRUPTCY
Make timely payments, if keeping your house. If you did not reaffirm your home mortgage loans in Chapter 7 but plan to keep your property, just continue to make your house payments on time. The bank still has a lien on your home and can foreclose if you fall behind on the payments. Note, as mentioned above, if you did not reaffirm the debt, your payments (or non-payments) will not be reported to the credit bureau.
Can I walk away from my home after my Chapter 7 bankruptcy? If you did not reaffirm your mortgage loan in Chapter 7, you have more options than if you reaffirmed the loan. (There is no reaffirmation in Chapter 13.) If you do not reaffirm your mortgage loan and decide at a later date that you no longer wish to keep your home, you can simply stop making the payments. Eventually, the property will go into foreclosure, but the bank will not be able to obtain a deficiency judgment against you.
Can I walk away from my home after my Chapter 13 bankruptcy? It depends. Chapter 13 does not discharge your secured loans in most cases unless you surrender the property in your Chapter 13 plan. If you surrendered the property in your Chapter 13 plan, then you can treat it the same as if you had discharged the debt in Chapter 7. (See prior paragraph.)
Quick Note –- Surrendering property in bankruptcy: Surrendering real property in bankruptcy does not give the property back to the bank or remove your name from the title. When you surrender a home in bankruptcy, you are informing the court and the creditor that you no longer wish to retain the property. Your liability for loans connected to surrendered property is discharged when you complete the bankruptcy and the judge signs the discharge order. However, the property still has to go through the foreclosure process to remove your name from the title, unless you shorten the process by entering into a short sale or deed in lieu of foreclosure.
Foreclosure of a discharged mortgage loan and credit reporting. If you stop paying on a discharged mortgage loan, and the home goes into foreclosure, the loan must still be listed on your credit report as discharged in bankruptcy with a balance of $0. Although it is possible that the foreclosure will show in the public records section of your credit report, the debt is discharged. (Whether a foreclosure can be listed on a debtor’s credit report after the debt is discharged is an unsettled area of law.)
Must I maintain a house that I surrendered in Chapter 7 or Chapter 13? If you surrendered a house in bankruptcy (or later decide to walk away from your home on which you did not reaffirm the loan), you are responsible for keeping the property up to code until the property transfers to a new owner. If the grass gets too high or trash piles up, you could be fined by your municipality.
Must I pay HOA or COA fees on a house that I surrendered in Chapter 7 or Chapter 13? You are responsible for any post-filing homeowners association or condo association fees until the deed transfers to a new owner. (E.g., after a sheriff’s sale, short-sale, or deed in lieu.) Pre-filing HOA or COA fees are included in your discharge. If you fail to pay the post-filing HOA or COA fees, the association can try to collect them. Therefore, it is often best to live on the property for as long as possible, particularly if the fees will make it a burden to maintain two residences.
Should I keep homeowners insurance on a house I surrendered in Chapter 7 or Chapter 13? If you surrender a home in bankruptcy or later walk away from your home, you still have potential liability for injuries to persons and other properties arising from your property until ownership transfers. If you stop paying your homeowners insurance, the bank may purchase insurance on the property. However, such insurance typically covers the bank’s interest only. Therefore, you should consider keeping your policy in place until the deed transfers.
Quick Note –- Renting out your home: Keeping homeowners insurance on an empty house can be much more expensive than when you lived in it. Therefore, if you must move out before the foreclosure process is complete, you might want to consider renting out the property. However, you would need to inform the renter that the house is in foreclosure and that notices will come to the house. Any lease would need to terminate upon the sale of the house. (You should be sure that your homeowner’s insurance policy will cover renters.)
Can I obtain a mortgage modification after my discharge? Many banks will offer a modification to your mortgage after your bankruptcy discharge. (A modification is a change to the terms of your current loan.) I have had several clients over the years who have obtained mortgage modifications after bankruptcy, even on loans they did not reaffirm. However, there are no guarantees, and you will have to go through the bank’s process.
Keep in mind that, unlike refinancing, mortgage modification does not create a new loan. Therefore, as long as you did not reaffirm the loan during your bankruptcy, your personal liability is still discharged even if you later obtain a mortgage modification.
Post-discharge modifications and credit reporting: In most instances, modifying a loan that was not reaffirmed will not cause it to show on your credit report.
Can I refinance my home after discharge? It depends on several factors, including the bank’s policies. (Refinancing replaces your current loan with a new loan.) The standards for refinancing are higher than that for a modification. As such, it will typically take some time after bankruptcy to rebuild your credit to the point where refinancing is possible. If you refinance rather than modify your loan, the new loan should begin to show on your credit report. Also, by refinancing, you are again accepting personal liability for the loan.
Quick Note –- Refinancing with your current bank: Some banks will not refinance a loan for a current customer if the homeowner did not sign a reaffirmation agreement. Therefore, in some circumstances, you may need to seek to refinance from another bank or look at a modification instead.
YOUR CURRENT VEHICLES AFTER BANKRUPTCY
Make timely payments, if keeping a vehicle. If you have an auto loan that you did not reaffirm, but you wish to keep the vehicle, just continue to make timely payments. The lender retains a lien on your car and can repossess if you get behind on payments. If you did not reaffirm the loan, it is unlikely that your credit report will reflect your post-bankruptcy payments.
Can I return my car after bankruptcy? If you did not reaffirm your car loan and no longer wish to keep your vehicle, you can arrange to turn it over to the lender (a voluntary repossession). As long as you did not reaffirm the debt in your bankruptcy, the creditor cannot obtain a deficiency judgment. However, if you reaffirmed the loan in bankruptcy, the lender would be able to secure a deficiency judgment.
FINANCING A VEHICLE AFTER BANKRUPTCY
Can I get a car loan after bankruptcy? Yes, but first let me say that the best car is a paid-off car. Even if you are putting a couple of thousand dollars a year into maintaining an old car, it is still far less than the monthly cost of purchasing a car on credit. (Not to mention the increase in insurance rates that will likely accompany the purchase.) If you can pay in cash for your car, that is almost always the best option. I recommend avoiding vehicle loans unless there is no other choice.
That being said, if you need a car and cannot pay cash, financing a vehicle can help you rebuild your credit. Vehicle financing is often more available after bankruptcy than other types of credit.
Tips for financing a vehicle without getting ripped off.
Shop around. Interests rate for post-bankruptcy buyers will be significantly higher than for buyers with excellent credit. However, it need not be an extortionary rate.
Never roll over an old car loan balance. If you still have a balance on your current car loan, the dealer may suggest that you roll that balance into a new car loan. Don’t do it. Rolling over the balance of an old car loan into a new loan is one of the worst financial mistakes someone can make when purchasing a car. I have had clients who were forced into bankruptcy by the enormous payments generated by such loans.
Rolling over a loan will result in both a larger balance and increased payments. Essentially, you are adding the remaining balance of your old car loan to the price of the new vehicle, thus paying more for the new car. It’s a good deal for the dealer and bank, but a very bad deal for you. A better option is to wait until you pay off the old car before looking at a newer one.
Keep Payments Low. If you must buy a car on credit, your new car payment should be as low as reasonably possible. I cannot stress this point too much. A $500 or $600 a month car payment may become a millstone around your neck before you know it. Keep the payment at a level that you could afford even if you lost a substantial part of your income.
Quick Note –- Is it worth it? The latest model cars can be incredibly seductive, but in the end, they are just transportation. Think about whether you need all of those bells and whistles. Wouldn’t you rather have the security of growing savings and retirement accounts than the latest Bluetooth-enabled cup holder? Isn’t a family vacation more satisfying than titanium wheels?
Avoid excessively long loans. Try to avoid loans that extend beyond three or four years. Consider whether you want to be making payments on a depreciating asset five, six, or seven years from now. If the payments on a shorter-term loan are too high, consider purchasing a less expensive vehicle.
Always Buy Used. New cars are a horrible investment. As soon as you purchase a brand-new car, its value plummets. In fact, I cannot think of a good reason for an individual to buy a new car unless it is a business tax write-off. So, it is best to limit your purchase to an inexpensive used car.
Debts Discharged in Bankruptcy Are NOT Taxable. I cannot emphasize this point enough. You do not have to pay taxes on debts discharged in bankruptcy, even if you receive a 1099C or 1099A form from the creditor.
What should I do if I receive a 1099C form after bankruptcy? Creditors file 1099C forms for debts that have been forgiven by the creditor or otherwise canceled. However, they should not file a 1099C for debts discharged in bankruptcy, unless the debt was for business or investment purposes. Regardless of the purpose of the debt, if it was discharged in bankruptcy, it is not taxable.
If you get a 1099C form, do not ignore it. If you receive a 1099C for a debt discharged in your bankruptcy, you will need to file IRS form Form 982 with your tax return to notify the IRS that the debt was discharged in bankruptcy.
Quick Note –- Late 1099 Forms: Creditors often issue 1099C forms late (even years late). It is not all that unusual to receive a 1099C as much as two or three years after your discharge. If you are unsure if creditors have filed 1099C forms, you can order a “wage and income transcript” with IRS form 4506-T.
What should I do if my mortgage lender issues a form 1099A during or after my bankruptcy? If you are surrendering real property in bankruptcy, you may receive a form 1099A form from your mortgage lender if (1) the property is vacant, and (2) the lender secured the property. However, the 1099A does not create taxable income, and you do not need to take any action in response to it.
Quick Note — Taxable gain after bankruptcy: If you sell your home or other secured property for a profit after your discharge, the gain may be taxable even if you did not reaffirm the underlying debt.
For more on post-bankruptcy tax issues, see my post on discharging taxes. If you are unsure about how to handle a 1099C or 1099A form, speak to an experienced CPA who understands that discharged debts are not taxable (not all do), or call your attorney.
PLANNING FOR A BETTER FINANCIAL FUTURE
Set up a savings plan. In other words, pay yourself first. Even if it is only a few dollars per pay period, try to put aside a little for emergencies (as well as fun things, like vacations) as soon as you are able. For many people who have been out of work or are otherwise financially devastated, it can be hard to imagine being able to save again. Still, a small amount can add up over the long run.
Ideally, you should eventually save six months of living expenses. However, having even a modest amount set aside in savings can help when the unexpected comes up. Start small and aim for a month’s salary in savings, then work up from there. Arranging for this money to be transferred directly from your paycheck to your savings account, so you never see it, will make it easier to save.
Quick Note –- Never rely on credit as an emergency fund: If you have a savings plan, you can avoid one of the most destructive financial habits: using credit as an emergency fund. It is better to take a little money out of savings to replace the flat tire or the washing machine that died suddenly, than taking on new debt.
Contribute to a retirement plan. If you already have a 401k or other retirement plan, try to contribute as much to it as possible. At the very least, kick in as much as your employer matches. (An employer’s matched contribution is free money that you will lose by not contributing to the plan.) Of course, if you can max out your contributions, so much the better. However, as with general savings, even small contributions add up over time.
If you do not have an employer-based retirement plan (or you wish to save more), consider opening a no-fee or low-fee traditional or Roth IRA. Make regular contributions that come out of your account automatically on the day you are paid. As with other savings, the key to retirement savings is to set up the account so that you never see the money.
Update your will. Because your financial situation has changed, I recommend that you review your will to see if it needs revision. If you do not have a will, you may wish to have an attorney draft one. I am always happy to refer my clients to an estates attorney who can revise a will or write a new one at minimal cost.
If you take care of these few items after your bankruptcy, you will be well on your way to a better financial future.
Thank you for your many comments and questions on this topic. Please note that I have closed the comment section on this topic for the time being, although I may reopen it when I revise this post.
Responses to questions on this blog are general in nature and are not legal advice. If you need legal advice, please contact an attorney.