Life After Bankruptcy: What You Can and Can’t Do

Most people file for bankruptcy only when they’ve hit rock bottom financially. Although bankruptcy can wipe out most of your unsecured debt, a bankruptcy of any kind can stay on your credit report for up to ten years and make it difficult to qualify for credit for those several years, at least.

For many debtors, the automatic stay of collection calls and letters, the protection from liens and wage garnishments, and the overall debt relief are major benefits of filing for bankruptcy. Life after bankruptcy can include several long-term financial hardships, but you can recover if you learn what you can and cannot do after bankruptcy, you keep a consistent focus on rebuilding your credit, and manage your finances well.

What Happens After You File for Bankruptcy

If you find yourself at a point where you won’t be able to pay off your debts, filing for bankruptcy can be the last, best move you have available. For individuals, there are two main options to choose from: Chapter 7 and Chapter 13. Each type of bankruptcy will have consequences that may last for years.

Brad Reichert, a financial expert and the founder and managing director of Reichert Asset Management LLC, explains more about bankruptcy. “Keep in mind that although there may be a ‘stigma’ associated with having to file bankruptcy, the fact is, The U.S. Bankruptcy Courts system was created to give people a legitimately legal way out of their overwhelming debt-related predicaments,” Reichert shares. 

Reichert continues, “By filing for bankruptcy, you’re not running away from your debts or saying you’re not capable of handling these issues, but rather you’re facing them and the situation that got you to this point.” He says that during bankruptcy, you’re effectively petitioning the legal system for relief from your debts. You do this by making a compromise with your creditors to settle your accounts with them for as much as you have to offer them at present.

Here are the specific ways bankruptcy impacts your finances and your life:

Credit Score and Other Consequences

After you file for bankruptcy, it will show up on the credit report, almost immediately. Chapter 7 bankruptcy will stay on your credit report for ten years after you file. Chapter 13 bankruptcy will stay on your credit report for seven years after a successful completion of your repayment plan and full discharge of your bankruptcy case.

After you file your bankruptcy petition, your credit score will be much lower than it was, even lower than before you filed for bankruptcy, that is, if you have had late payments or potential account charge-offs up until then. Generally, you can expect a reduction of 100 to 200 points immediately after your bankruptcy petition is reported to your credit reports. 

Your credit cards will also be closed by their issuers, immediately after you file for bankruptcy, and it will be very difficult to get a new credit card line for at least 3-4 years after that unless it is a secured credit card, where you deposit cash in a savings account, as security for your credit line.  You may be able to qualify for a secured card as soon as two years after filing for bankruptcy, depending on the lender.

Your potential employer and other people may be able to find out if you’ve filed for bankruptcy because the Chapter 7 or 13 petition you file in court is considered public information. All court records are available through the Public Access to Court Electronic Records (PACER) for a small fee.

If you’re applying for a new job or leasing a new apartment, they may be able to learn of your bankruptcy when they verify your background.

Limitations After Filing Bankruptcy

If you’re considering bankruptcy, you may be wondering what you cannot do after filing for bankruptcy. Certain activities and actions are restricted during and after the bankruptcy process, depending on which chapter you file under. Talk to your bankruptcy lawyer to learn more about the limitations applicable to your financial situation.

For example, if you file for Chapter 7, you can’t lie under oath about your property and financial assets to make them appear larger or smaller in value than they really are. If you want to avoid foreclosure, you can’t miss payments on secured debts like your mortgage and car loan. 

Additionally, bankruptcy laws don’t allow you to retain property that is required to discharge your debts. Also, it’s important that you don’t intentionally max out your credit cards shortly before you file for bankruptcy because the federal court isn’t likely to view this favorably.  

If you’re filing for Chapter 13 bankruptcy, you may be able to keep your personal assets during the reorganization. However, you can’t enter into any new purchases or leases without the court’s approval. You also can’t use credit cards or incur further debt if you’re on the repayment plan. For successful completion of Chapter 13, you must stick to the payment plan that is approved by the court.

The most important thing you can’t do when filing any type of bankruptcy is trying to deceive. If you fail to disclose your assets or income (including Social Security income), they may be seized during the bankruptcy proceedings, and you may face criminal charges.  

6 Tips To Recover After a Bankruptcy

While it may be difficult, it is possible to begin rebuilding your credit and start recovering financially, immediately after you file for bankruptcy. Bankruptcy can provide you with a clean slate, and you can make the most of it with the tips we’ve provided below.

1. Save All Your Case Related Paperwork

Save all your bankruptcy case-related paperwork because you may need it in the future. You’ll need the documents when you apply for a loan or if a lender contacts you about debt included in the filing.

Here’s what you should keep a copy of:

• Bankruptcy petition
• Correspondence with the bankruptcy trustee, bankruptcy court, and bankruptcy attorney
• Proof of income you included in the petition
• Final bankruptcy discharge

2. Maintain a Home and Job

Your first priority after a bankruptcy filing is to maintain stable employment and residence. If you don’t have a job currently, it’s important to start looking for one as soon as possible.

Having a reliable, stable source of income and residential history demonstrates to creditors that you’re reliable and able to pay your bills and debts going forward. This will be the foundation that allows you to start rebuilding your life after bankruptcy.

3. Pay All Bills on Time

You’ll need to be very careful to ensure that your credit record stays clean after bankruptcy. This means paying all your bills on time every month. Set up an auto-payment for each of them, to ensure you don’t miss any due dates.

Make a budget and be watchful to ensure your expenses are not beyond what you can comfortably afford each month. Your repayment history is the most important factor that determines your credit score.

4. Build an Emergency Fund

Start building healthy financial habits, such as setting aside money each month to cover emergencies. Learning how to manage money when your income is temporarily low, or when your expenses are temporarily larger than normal, is an important part of rebuilding your life after bankruptcy.  An emergency reserve fund will help you do that.

Make it a habit to put aside a predetermined amount of money each month in a separate bank account. An emergency fund will allow you to pay for unexpected expenses without having to resort to borrowing. This is even more important because you won’t be able to get credit or loans easily in the years immediately after bankruptcy.

5. Start Rebuilding Your Credit

Your credit score will take a huge hit when you file for bankruptcy. You’ll need to start building it up again by using credit wisely. Consider getting a secured credit card if you can’t qualify for a regular unsecured credit card.

Use the card responsibly and ensure you only charge expenses you’ll be able to pay off at the end of the month so you don’t accumulate credit card debt again. Doing this over a period of time will help you improve your credit score. You can also get a credit builder loan to help you rebuild your credit.

Keep in mind that the interest rates on any new credit you may qualify for will be much higher than average, after bankruptcy.  You can expect to pay APRs of 25%-30% or more, on most credit lines or loans.

6. Monitor Your Credit Report

Check your credit report regularly to ensure that all information on your file is accurate. For example, if a discharged debt isn’t showing up accurately, or if you notice a late payment that isn’t correct, your credit score can be lower than what it should be.

If you spot any errors on the credit report, fill out a dispute form with the respective credit bureau where the debt is being inaccurately reported and provide them with documentation to support your claim. Credit bureaus are required to investigate any disputes and correct errors within a minimum of 30 days.

The Bottom Line on What You Can’t Do After Bankruptcy

Once you determine that bankruptcy is the right option for you and you decide to file your petition, your life may be quite different after that.

So, what can you not do after filing for bankruptcy? That depends on the type of bankruptcy you file. Limitations may include 1) not selling a property without court approval, 2) not taking on new debt, and 3) not ignoring required payments on non-dischargeable debts.

Bankruptcy isn’t the end of the world, however. Also, there are some cheap ways to file for bankruptcy.

You can find your financial footing again if you use credit wisely, budget well, and learn good financial management. Consider credit counseling to learn more about budgeting and responsible credit use.