All About Chapter 7 Bankruptcy: Process, Duration, Effect On Credit

As many potential bankruptcy filers understand, filing for Chapter 7 bankruptcy may impact the filer’s credit. But the details about how Chapter 7 bankruptcy works, how long it takes and how it might affect a filer’s financial future are less well known.


Here’s an outline of Chapter 7 bankruptcy’s process, duration and likely effect on a credit score.


The Chapter 7 Bankruptcy Court Process & Duration


Chapter 7 bankruptcy tends to move quickly: from start to finish, the entire process may take as little as four to six months. During that time, filers can expect the following events:


·         Completion of the credit counseling session: In order for the court to accept a Chapter 7 petition, filers must complete a credit counseling session no more than 180 days prior to filing. Filers must show proof of completion at the time of filing.

·         Submission of petition: At this time, the court enters an automatic stay order, which prevents creditors from taking any collection action against the filer and lasts for the duration of the case or until the stay is lifted by the court. All creditors listed in the petition are mailed a notice that the bankruptcy case has begun.

·         Submission of schedules: Within 15 days of filing the initial petition, filers must submit to the court schedules outlining their income, assets, debts and expenses.

·         Statement of intention: Within 30 days of filing, filers must indicate how they plan to handle their secured debts. They can redeem them (by paying a lump sum for the item’s fair market value), reaffirm them (by agreeing to continue making payments), or surrender them (by giving up the property and being relieved of the loan attached to it).

·         Meeting of creditors: About six weeks after the petition is filed, filers must testify in front of the bankruptcy trustee (and any creditors who choose to attend) to the truth and completeness of all information included in the petition and schedules.

·         Creditor objections: After the creditors meeting, creditors have 30 days to object to any exemption a filer claims and 60 days to object to the discharge of any debt a filer listed. Specific rules outline the circumstances under which a creditor can object.

·         Liquidation of assets: Filers who have possessions not protected by state or federal exemptions may be subject to a liquidation sale. Any money raised from the sale of non-exempt assets is divided among creditors as determined by the claims those creditors file.

·         Financial management course: Before being eligible for a bankruptcy discharge, all filers must complete a financial management (also called debtor education) course to comply with the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

·         Bankruptcy discharge: Government entities have the longest window of any creditor (180 days, or about six months) to submit proofs of claim against a filer. After this deadline, assuming a filer has adhered to all rules of the bankruptcy court, a filer may be eligible for the bankruptcy discharge.


Chapter 7 Bankruptcy: Effect on Credit


The effect that Chapter 7 bankruptcy can have on a filer’s credit is often exaggerated and misstated in the media.


It’s true that filing for bankruptcy will affect the filer’s credit. That’s because almost any financial move (positive or negative) has the potential to affect a person’s credit.


Here’s a look at how a person’s credit score is calculated and how Chapter 7 bankruptcy might affect that calculation.


How a Credit Score Is Calculated


The Fair Isaac Corporation’s (FICO) credit score formula is the one most commonly used by U.S. lenders. The factors that affect a credit score are:


·         Payment history: 35 percent of a credit score depends on how borrowers make payments. Timely, consistent payments build a credit score. Missed payments and defaults hurt it.

·         Debt-to-credit ratio: 30 percent of a credit score depends on how much credit a person has available. More available credit is good; being maxed out on credit cards hurts scores.

·         Length of credit history: 15 percent of a credit score depends on age. The older, the better.

·         New credit applications: 10 percent of a credit score relies on how much credit a person apparently needs (as determined by new credit applications). Applying for lots of credit at the same time hurts a score; spreading applications out over time helps.

·         Diversity of credit: 10 percent of a credit score depends on the mix of credit types: many types of credit raises a score, few types lowers it.


How Chapter 7 Bankruptcy Might Affect a Credit Score


Negative credit actions, including bankruptcy, stay on a credit report for 10 years. But their impact on a person’s credit score can diminish over time because recent actions count more than long-ago actions.


Immediately after filing for Chapter 7, a person’s credit will not be strong: Chapter 7 wipes out many debts and may leave little besides itself on a credit report. But most people who need Chapter 7 protection do not have strong credit to begin with: being maxed out on credit cards, missing payments, defaulting on loans and other credit behaviors typical of those who seek bankruptcy negatively impact a credit score.


In the months and years after filing for Chapter 7, filers can rebuild and improve their credit by making timely payments on all loans, using a small amount of credit wisely and avoiding unnecessary debt.

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