How Does Bankruptcy Affect Your Credit

Bankruptcy is a legal process concerning debts.  Basically, if you reach a point where you can’t repay your debts, you may have to go through bankruptcy. Declaring yourself bankrupt can stay on your file for several years, even when the proceedings are over. But what is bankruptcy and how does bankruptcy affect your credit?

What Is Bankruptcy?

Usually, bankruptcy is imposed by a court order. This is often started by the person who owes money. You may also hear the process called insolvency or liquidation bankruptcy.

Bankruptcy can occur when you can’t pay your bills or your monthly expenses, even if you have cut back on any luxuries. Perhaps you are dealing with unexpected events in your life such as a serious illness or a divorce. This can cause debt to increase and possibly lead to bankruptcy.

Very often, a bankruptcy is declared by the person who can’t meet their debt obligations. After that, a trustee takes control of the assets and divides them among creditors according to how much money they’re owed. In fact, creditors will usually get around 75% of what a person or business owes them.

Reasons Why Bankruptcy Appears On A Credit Report

So now you know what bankruptcy is, how does it affect your credit?

Essentially, if you declare bankruptcy, it means that a bankruptcy filer status will appear on your credit report for a number of years. This information is usually in the public record section of a person’s credit file. It may include a bankruptcy discharge date, which is the date proceedings come to an end.

However, there could be other reasons why a bankruptcy filer status appears on a credit report. For example, a debt agreement, personal insolvency agreement or composition with creditors can also lead to a bankruptcy filer status.

Three Types of Bankruptcies

There are three types of bankruptcy. Here are some examples of how bankruptcy affects your credit, according to the type of bankruptcy you file:

• If you declare you’re bankrupt but have no debt repayments, then you won’t have a bankruptcy filer status on your credit report.
• However, you might be unable to meet obligations under a debt agreement or personal insolvency agreement. In this case, bankruptcy filer status will go on your credit report for two years.
• Meanwhile, if you file a composition with creditors and bankruptcy is one of your options, then bankruptcy filer status will appear on your credit report. This could be for up to five years.

What Is Voluntary Bankruptcy and How Do You File For It?

Voluntary bankruptcy is bankruptcy you file yourself. This bankruptcy type doesn’t include a debt repayment option. As such, voluntary bankruptcy won’t appear on your credit report as a status.

When you file for bankruptcy, you must gather all the information about your income and expenses, financial transactions and other debts to fill out bankruptcy forms. Furthermore, if you file bankruptcy credits through debt consolidation loans or debt settlement programs, these are not bankruptcy. Instead, bankruptcy is filed when you put in the forms on your own.

What Is Involuntary Bankruptcy?

Involuntary bankruptcy occurs as the creditor’s initiative, not yours. It’s usually bankruptcy as a debt repayment option. In basic terms, involuntary bankruptcy occurs when proceedings are started against you by a creditor.  You may receive a bankruptcy notice from the credit provider who has concerns about your debt repayment plan.

What Is Bankruptcy In Composition With Creditors?

When you file bankruptcy in composition with creditors, you and your creditors agree to negotiations on how you’ll repay the debt. This bankruptcy type appears on your credit report for up to five years.

What Happens if You Don’t Pay Your Debts

Unfortunately, bankruptcy is not the only way you can ruin your credit. If you don’t meet your monthly debt repayments, companies may take legal action against you. This could include repossession of your house or car, court action, or disconnecting your utility support.

Therefore, in some cases, bankruptcy may become necessary. For some people, it’s often a relief to not have the stress of unpaid bills hanging over your head. However, the bankruptcy filer status will remain on your credit report until you’ve made all payments under the proceedings.

How Does Bankruptcy Affect You?

Even if the court action is over and the proceedings are at an end, filing for bankruptcy can seriously affect you.

Perhaps you have been forced to sell belongings that matter to you to pay off your debts, including furniture or treasured possessions. Even your car and home could be at risk.

Moreover, the bankruptcy status will stay on your credit report for a number of years. Hence that is how bankruptcy can affect your credit, because your credit score will be damaged.  For example, if you choose to buy something in the future on credit, your bankruptcy status will make you appear less responsible than someone without it.

Seek Professional Help with Your Financial Difficulties

With this in mind, for some people, bankruptcy is not the answer.  There’s a chance that it can simply increase your debt load. Therefore, it may be advisable to seek professional help with your debts before bankruptcy proceedings begin.

The process can be complex, so it’s good to seek advice first before you take this step. A bankruptcy trustee will explain the process to you.

What Is A Bankruptcy Trustee?

A bankruptcy trustee is a person who helps you with proceedings and enforces the rules. For example, the trustee may tell creditors how much you can afford to pay each month to repay your debts. It’s important that you get along well with the bankruptcy trustee. This is because you must talk to them regularly throughout the proceedings.

How Do I Choose A Bankruptcy Trustee?

Bankruptcy trustees are good at different things. For example, some specialise more in getting rid of debt, while others specialise more in bankruptcy process questions.

You should look for a trustee who is willing to listen to your individual circumstances. Make sure you ask about their fees and charges too.

How Long Does It Take To Finish Bankruptcy Proceedings?

In bankruptcy proceedings, you must make sure that all your bankruptcy documents are filled in correctly. If you don’t, bankruptcy may not happen or it could be postponed. This is why it’s good to get professional help with bankruptcy proceedings if possible.

By following the rules carefully, you can expect to finish bankruptcy proceedings within three months. Although if you have bankruptcy status, this could stay on your file for a number of years and affect your credit.