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? The good news is that there is life after bankruptcy. 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.
Keep copies of your bankruptcy paperwork. It is important to keep copies of your bankruptcy petition, schedules, and discharge order 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 apply for a professional license in some states. In that case, you can obtain a certified copy from the court through Pacer for a fee.
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 violates 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 Chapter 7 bankruptcy? If you unintentionally fail to list an unsecured debt in a no-asset Chapter 7 case in this district, 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 discuss it with your attorney.
What if I forgot to list a debt in my Chapter 13 bankruptcy? Filing to list a debt in a Chapter 13 case can leave an opening for a creditor to claim that the debt is not discharged. Therefore, you should speak to your attorney if you believe it is an issue.
Some scammers attempt to get people who filed for bankruptcy to pay debts they no longer owe. Even worse, scammers have impersonated attorneys and asked clients to send money or personal information. A common scheme is to call and claim that a debt was not discharged and they have to send money to pay it. If someone calls claiming to be your attorney and asks for additional funds or personal information, hang up and contact your attorney.
Keeping track of your credit is crucial 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 from each of the three major credit bureaus at www.annualcreditreport.com.
Quick Note: Because of the Covid-19 Crisis, all three credit bureaus offer free weekly credit reports at AnnualCreditReport.com. (Previously the reports were limited to once per year.)
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 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 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. The balance should be $0 (unless you reaffirmed the debt).
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 the 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: No federal or Pennsylvania law or statute requires 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. (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 have 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 violates the federal Fair Credit Reporting Act (FCRA). To sue under the FCRA, you must first dispute the debt with the credit bureaus. However, the creditor and the credit bureaus could pay significant damages and your attorney's fees if the false information is not corrected. Therefore, speak to your attorney if you find incorrect information on your credit report.
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.
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 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 accumulating interest. Either way, you must arrange to get these loans back on track after bankruptcy.
Fortunately, there are various programs to lessen the burden of federal student loan payments worth exploring to see whether you might qualify, including income-based repayment. In addition, 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, the 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.
Quick Note: If you discharged taxes in bankruptcy, and your tax statement does not reflect the amount discharged after a few months, you might need to contact the taxing agency. (For details, see my blog post on discharging income tax in bankruptcy.)
Other Nondischaregable debts. 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.
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. You should also 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).
Example: 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 good to have a separate card for each of you.
Quick Note: A secured credit card is not the same as a prepaid credit card. Although very convenient, prepaid credit cards do nothing to improve your credit.
A small unsecured line of credit can help rebuild your credit. Once you have begun to reestablish credit with a secured credit card, you may want to obtain a small line of credit. As with a credit card, keep the use below 20% of the balance and repay the loan before using it again.
A modest car loan is another way to rebuild credit if you need a vehicle. 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.
The main traps for post-discharge debtors are (a) the temptation to open too many credit accounts, (b) incurring too much debt, and (c) late payments.
Although most debtors can obtain post-bankruptcy loans and credit accounts, you must be careful. 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. Unfortunately, that mindset is a recipe for disaster. With few exceptions, debt is not your friend.
One or two credit cards combined with some other form of credit, such as a personal line of credit or modest car loan, should be enough for anyone.
Keep in mind that each time you apply for credit, the inquiry reduces your score a bit. Too many inquiries on your credit report, and you will start to look irresponsible. 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.
Understanding the Income-to-Debt 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 they have compared to their income is much lower after bankruptcy. The income-to-debt ratio is a significant factor in credit scoring. Therefore, you want to keep this ratio low.
Understanding the Debt -to-Available-Credit Ratio. The debt-to-available-credit ratio is just as important, which measures the percentage of available credit you use compared to your overall available credit.
Example: If you have two credit cards with $500 limits, your total available credit is $1000. If you spend $50 on one card and $150 on the other ($200 total), you have used 20% of 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 credit user. 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: Try to keep your debt at a level you can afford, even if you lost a substantial amount of your income. Think half or less. In other words, when buying a car, house, or any other high-cost item, try to buy something that is half or less the amount you can afford.
I know that this seems obvious, but late payments will devastate your credit rating. Late payments after bankruptcy are often a result of debtors not getting back into the habit of paying on time. Set up a time each month to pay bills and use automatic payments if necessary.
If you cannot make payments on time, try to talk to the creditor before it becomes an issue. If the problem is severe, speak to an attorney. (I am happy to talk to my former clients and try to help them stay on track.)
Quick Note. CREDIT REPAIR IS A SCAM. You may receive solicitations from "credit repair" companies. Credit repair is a scam, and the services they sell are worthless. Unfortunately, there is no quick fix when it comes to credit issues. But you can rebuild your credit systematically over time.
Here are answers to some common questions about homes and mortgage loans after bankruptcy:
What should I do if I want to keep my home after bankruptcy? Make timely payments if keeping your house. If you did not reaffirm your home mortgage loans in Chapter 7 but are current and plan to keep your property, 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. 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 later that you no longer wish to keep your home, you can 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. However, if you surrendered the property in your Chapter 13 plan, you can treat it the same as if you had discharged the debt in Chapter 7. (See the prior paragraph.)
Does surrendering property in bankruptcy give it back to the bank? Surrendering real property in bankruptcy does not give the property back to the bank or remove your name from the title. Rather, 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 the surrendered property will be discharged when you complete the bankruptcy. However, the property still has to go through foreclosure to remove your name from the title unless you shorten the process by entering into a short sale or deed in lieu of foreclosure.
Will a foreclosure of my discharged mortgage loan show on my credit report? If you stop paying on a discharged mortgage loan and the home goes into foreclosure, the loan should still be listed on your credit report as discharged in bankruptcy with a balance of $0. Although the foreclosure may show in the public records section of your credit report, the debt is discharged. (Whether a foreclosure should be listed on a debtor's credit report after the debt is discharged is an unsettled area of law.)
Must I maintain a house I surrendered in Chapter 7 or Chapter 13? If you surrender 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 it 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 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.
Can I rent out my home after surrendering it in bankruptcy? 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 who have obtained mortgage modifications after bankruptcy, even on loans they did not reaffirm. However, there are no guarantees, and you must 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.
Quick Note: In most instances, modifying a loan that was not reaffirmed will not cause the payments 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 those for a modification. 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: Some banks will not refinance a current customer's loan 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.
Make timely payments if keeping a car or other vehicle. If you have an auto loan that you did not reaffirm but wish to keep the vehicle, 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 could secure a deficiency judgment.
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 put a couple of thousand dollars a year into maintaining an old car, it is still far less than the cost of purchasing a car on credit. (Not to mention the increase in insurance rates that will likely accompany the purchase.) Therefore, if you can pay in cash for your car, that is usually your best option. I recommend avoiding vehicle loans or keeping them very small.
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.
Shop around. Interest rates for post-bankruptcy buyers will be significantly higher than those 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 it 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 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 horrible 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 monthly car payment may become a millstone around your neck before you know it. So keep the payment at a level you can afford even if you lose 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?
Avoid excessively long loans. Try to avoid loans that extend beyond three or four years. Consider whether you want to make payments on a depreciating asset in five, six, or seven years. 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, limiting your purchase to an inexpensive used car is best.
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 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 for a debt discharged in bankruptcy, do not ignore it. To avoid paying income tax, you must 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 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 it. 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 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.
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 saving easier.
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 a flat tire or a washing machine that died suddenly than taking on new debt.
If you already have a 401k or another 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 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 from 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.
Because your financial situation has changed, I recommend reviewing 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.
Philadelphia Bankruptcy Attorney is published by Harborstone Law LLP. Harborstone Law represents clients in debt matters in the greater Philadelphia area and throughout Pennsylvania
