Timing is everything: Bankruptcy dates to know
By Miranda Marquit
April 16, 2015
Chances are you didn't create a financial plan that includes bankruptcy. However, unexpected setbacks and mistakes can lead to an untenable money situation that requires bankruptcy as a way to begin rebuilding your finances.
Timing is everything when you file for bankruptcy. Do you know when your credit rating will improve? What if you want to file for bankruptcy a second time? Make sure you know the answers before you even think about filing.
First, here's how bankruptcy works.
Chapter 7 and Chapter 13
There are two types most people think of: Chapter 7 and Chapter 13. Chapter 7 includes a discharge of debts after appropriate assets have been liquidated and applied to your obligations. Those who file for Chapter 7 tend to have very little disposable income. If you are making too much money, you have to file Chapter 13.
With Chapter 13 bankruptcy, the consumer is required to adhere to a repayment plan, followed over three to five years. A Chapter 13 often includes limited discharge of debt, if your situation means you can't repay the entire amount you owe. An advantage to Chapter 13 is that you may get to keep your property, while with Chapter 7, your property is more likely to be liquidated.
In both cases, the bankruptcy court approves your payment plan or the discharge of your debts and finalizes how creditors are paid. But, you have to qualify before the court will accept your petition to file, so don't assume it is the end-all solution. You may be rejected.
Still interested? Read on for critical dates that will affect you if you decide to file.
1. Filing date vs. discharge date
“Two of the most significant dates related to a bankruptcy case are the filing date and the discharge date,” explains Ryan Albaugh, an attorney specializing in bankruptcy and consumer law.
The filing date refers to when you file your petition and submit the case to the bankruptcy court. Your filing doesn't guarantee anything. Instead, you need to wait until the discharge date, which refers to when your case is concluded. In most cases, a Chapter 7 discharge takes place about four months after a filing is completed. With Chapter 13, the discharge doesn't take place until after the payment plan is completed. There are variances in timing, depending on objections made by creditors, as well as requirements the court may place on a debtor.
2. When you can file again
“Bankruptcy is intended for the honest and unfortunate person,” says Albaugh. It should not be a routine way to escape debt. Continual filing will keep your credit score low, and bar you from a number of financial opportunities.
“This may seem counterintuitive, but when people with many delinquent debts file, it actually improves their score.”
–Ryan Albaugh, bankruptcy attorney
Technically, there is no minimum waiting period between bankruptcy filings. There are, however, rules about the discharge of debt. These rules vary according to the type of bankruptcy you file (Chapter 7 or Chapter 13), as well as whether you file for a different types of bankruptcy successively (i.e. filing for Chapter 13 after filing for Chapter 7). Edrie Pfeiffer, an attorney at Hampton Roads Legal Services, offers these dates:
- If you file for Chapter 7 bankruptcy, you need to wait at least four years to file for another discharge of debt.
- You can file for Chapter 13 four years after filing for Chapter 7.
- After filing for Chapter 13, you can file for Chapter 13 again after two years.
- If you file a Chapter 13, you cannot file for Chapter 7 for six years, except under specific conditions.
There are also other rules about filing for Chapter 13 right after filing for Chapter 7, and the protection that can come in tax debt cases, even if you don't receive discharge, says Pfeiffer. Bankruptcy can be a complex process, and you should consult with a bankruptcy attorney about your options if your first bankruptcy case was dismissed or if your discharge was denied because you didn't meet requirements set by the court.
3. When to expect your credit score to improve
Dominant scoring model FICO indicates that the damage to a credit score can be as high as 240 points on a scale of 300-850, depending on various factors. The better your credit score before your bankruptcy, the bigger the damage. You can check your credit score for about $20 at MyFICO.com.
Albaugh says some consumers see immediate improvement in their scores following a bankruptcy. “This may seem counterintuitive, but when people with many delinquent debts file, it actually improves their score.” He says that bankruptcy creates an umbrella for the debt, lumping it together so that there are no longer multiple late payments from multiple accounts accruing on the credit report.
For most consumers, though, it takes a little longer to see an improvement in a credit situation. Depending on the type of bankruptcy filed, and the consumer's ability to begin rebuilding credit immediately, improvement can be seen over the course of a year.
Pfeiffer points out that most bankruptcies remain on your credit report for up to 10 years, impacting your score less as time progresses. In fact, she says that it's possible to build up to a 700 credit score in two years, if you work to keep your credit history clean and by paying your debts on time and in full.
4. When to apply for a mortgage
“Once your Chapter 7 bankruptcy case is discharged, it typically takes two to four years to qualify for a home loan,” says Albaugh. Even though your credit score might improve in a shorter timeframe, many lenders are wary of approving such a large loan to a consumer who has already filed for bankruptcy once.
The story is a little different with Chapter 13. “You may be able to qualify for a home loan within one year if you have sufficient income and the bankruptcy court allows it,” says Albaugh.
Bankruptcy is a big step that can affect your finances for years to come. Before you take that step, make sure you understand the way your credit will be impacted — and the length of time you will bear the consequences.