Navigating Bankruptcy

Navigating Bankruptcy

Bankruptcy Basics: How to File for Chapter 7 or Chapter 13

Paying Off Debt, Personal Finance

Bankruptcy Basics: How to File for Chapter 7 or Chapter 13

Paying Off Debt, Personal Finance
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Bankruptcy Basics: How to File for Chapter 7 or 13 Bankruptcy

Bankruptcy lets you get your overwhelming debt forgiven or restructured under the protection of a federal court.

Consumers have two main options:

  • Chapter 7 (liquidation): The quickest, simplest and most common type. Most unsecured debts, such as credit cards, medical debt and personal loans, are discharged, or forgiven. You may have to give up some assets, like an expensive car or jewelry, but the vast majority of filers do not.
  • Chapter 13 (reorganization): You repay some or all of your debt under a court-approved plan. Debts must be under a certain level, and you must have enough income to repay them over three to five years.

Bankruptcy isn’t easy or cheap, and it likely will crimp your access to new credit for seven to 10 years. But it may be the best way to salvage your finances.

Here’s a look at what bankruptcy is, whether it’s right for you, how to file, and what to watch out for along the way.

In this article:

What is bankruptcy?
Is bankruptcy right for me?
The importance of an attorney
Beware of scams
Chapter 7 versus Chapter 13
How to file for bankruptcy
Rebuilding after bankruptcy

What is bankruptcy?

Bankruptcy has some stigma and misconceptions surrounding it, and it’s not easy or cheap — but this debt relief tool might be your best bet for a better financial future.

You and your attorney will work to prove your eligibility for a debt discharge or reorganization to a bankruptcy trustee, who administers the proceedings.

Bankruptcy will leave a serious mark on your credit reports, and you’ll likely find it harder to borrow money for years to come. Even so, you’ll probably see your credit scores start to recover once you take this step to resolve your debts.

“Bankruptcy gives you a chance for a fresh start,” says Dan LaBert, executive director of the National Association of Consumer Bankruptcy Attorneys. “It’s not political; it could happen to anyone. I think when people feel that overwhelming pressure from financial stress — and they’re seeing that pressure stretch out and impact those around them — bankruptcy is a very legitimate option for them.”

Is bankruptcy right for me?

Bankruptcy may be your best solution if:

  • Your debts total more than half your annual income.
  • It would take five years or more to pay off your debt, even if you took extreme measures.
  • Your debt interferes with other aspects your life, such as your relationships or your ability to sleep.

Other debt relief options are available, such as a debt management plan through a credit counseling agency. Think through your circumstances and goals and take advantage of the free initial advice that credit counselors and many bankruptcy attorneys offer before deciding on a particular path.

“Bankruptcy is not a panacea for every situation, and I think that if you’re contemplating doing it, you should have a frank conversation with an attorney,” says California bankruptcy attorney Matthew Olson. “There’s the downside of the hit on your credit report, but frequently that will be outweighed by relief of stress and getting this problem solved and letting you move forward with your finances.”

The importance of an attorney

Bankruptcy is complicated. Although it can be tempting to hire a petition preparer to fill out paperwork and try to do the rest on your own, skipping a step or improperly filling out a form can lead to your case being thrown out or not having certain debts dismissed. That’s why finding the right bankruptcy attorney is important. In general, look for these three things when vetting potential attorneys:

  • Depth of knowledge.
  • Charges in line with the complexity of your case.
  • Confidence you can develop a good professional relationship.

“Working in bankruptcy requires a specialization,” says California bankruptcy attorney Cathy Moran. “You want someone who does enough of this kind of work to have some depth of knowledge. This is not a field for dabblers or generalists.”

Attorney fees vary greatly by location, attorney and complexity of the case. But Moran warns that bottom-of-the-barrel prices might leave you shortchanged.

“I think it’s almost inevitable that the people who are the cheapest are trouble,” Moran says. “They can’t afford to spend any time on your case, and if they think they can stay in business charging $700 for a bankruptcy, they haven’t done it very long to know that at that rate the lawyer is either making $3.25 an hour or the client is getting shorted.”

Beware of scams

Many companies promise quick fixes for your financial problems but can’t actually help resolve your debt. Watch out for any that:

  • Ask you to pay a fee before receiving any services.
  • Promise to wipe out your debt without you having to declare bankruptcy or pay a fee.
  • Tell you to make your debt payments to their company rather than your creditors, without your creditors’ explicit consent.
  • Tell you to stop communicating with your creditors or say you need professional help to contact them.
  • Promise to magically repair your credit.
  • Tell you you’re eligible for a government program to help relieve your debt; only the government agency in question can determine your eligibility.

If you think you’ve been scammed, contact the Federal Trade Commission or email the U.S. Trustee Program to get help.

Chapter 7 versus Chapter 13

Choosing between Chapter 7 and Chapter 13 will likely come down to your eligibility, your priorities and the value of assets that could be seized in a Chapter 7 bankruptcy. Each state lets you exempt a certain amount of value for certain assets; a house and car are the main ones people worry about.

Here’s how Chapter 7 and Chapter 13 work and which might be right for your situation.

 Chapter 7Chapter 13
How it worksThe vast majority of unsecured debts (such as credit cards, medical bills and personal loans) are forgiven. You must thoroughly document your finances and eligibility. You may give up some assets but likely won't have to. You get court approval of a plan to repay both unsecured and secured debts (such as mortgage and car loans) in part or whole. You'll pay over three to five years and will retain your assets.
Requirements• Must pass the means test if you have primarily consumer debts.
• Cannot have filed for Chapter 7 in the past eight years or Chapter 13 in the past six.
• Must have sufficient income.
• Unsecured debt cannot exceed $394,725. Secured debt cannot exceed $1,184,200.
• Must be current on tax filings.
• Cannot have filed for Chapter 13 in the past two years or Chapter 7 in the past four years.
Does it apply to every type of unsecured debt?No, you must still pay child support and debts you owe the government, such as taxes. The court is highly unlikely to forgive student loan debt.You'll have to repay some or all of your secured and unsecured debts over three to five years.
Can your house be seized?If the equity in your house exceeds exemption levels for your state, it may be sold. Otherwise you keep it.Not if you stay current on mortgage payments.
Can your car be seized?If the equity in your car exceeds the exemption level for your state, it may be sold. Otherwise you keep it.Not if you stay current on the payment plan.
How long does it stay on your credit reports?Up to 10 years.Up to 10 years, likely closer to seven.

An experienced bankruptcy attorney can help you determine which is best for your situation, but in general:


  • Your problem debts are ones that can be discharged, or forgiven, by Chapter 7, such as medical bills or credit card debt.
  • You don’t have many assets. Many Chapter 7 filers have modest cars and not much income. If the value of your possessions falls within the exemption limits, you don’t have to worry about your assets being seized.
  • You don’t think you’d be able to pay off your debts over three to five years.


  • You want to keep certain assets and/or you’re behind on your mortgage or car payments and want to make them up over time.
  • Most of your debts are student loans, child support or other debts that either can’t or are highly unlikely to be discharged under Chapter 7.
  • You have nonexempt assets that you want to keep, such as a nicer car or valuable jewelry.
  • You have a co-signer on an indebted account. With Chapter 7, creditors are free to go after your co-signer even though you’re protected. If you file Chapter 13, you can arrange to pay off the co-signed debt in your repayment plan, protecting your co-signer.

Chapter 11 is a less common form of consumer bankruptcy; it’s typically for those with debts greater than about $2 million.

How to file for bankruptcy

Your attorney will handle most of the paperwork. Your part is providing complete information on your income, expenses and debts. Here’s a general outline of what to expect:

Chapter 7chapter 13
Gather information: Speak to a lawyer about the best way to file. Bring documentation of your expenses and income, such as pay stubs, mortgage statement and car payment, to have as informed a conversation as possible.

Although attorney fees may be high, the cost of improperly filing can be even higher: Your case may be thrown out. Explore strategies for affording a lawyer or finding pro bono (no-charge) representation.
Begin counseling: Receive pre-bankruptcy credit counseling within 180 days before filing for bankruptcy. You can do this online or by phone with a credit counseling agency approved by the Department of Justice. This shouldn’t cost more than $50.
Collaborate on paperwork: Work with your lawyer to meet deadlines and fill out paperwork accurately and completely. This will include a list of your assets and liabilities, your budget and recent financial history.

For a Chapter 13 bankruptcy, you'll also file a proposed payment plan at this time.
File: To finish filing your petition, you’ll also have to pay a filing fee ($335 for Chapter 7, $310 for Chapter 13) unless you get a fee waiver.

Filing the petition will trigger what’s called an automatic stay, which means that most of your creditors won’t be able to pursue lawsuits, garnish your wages or contact you about your debts.

Note: Debtors in a Chapter 13 case must make their first payment within 30 days of filing.
Attend creditor meeting: At this meeting, a trustee will establish the accuracy of the papers you filed and may ask for further information about assets that might be nonexempt.

In most cases, the trustee will file the report and close the case shortly thereafter. If there are outstanding questions, the meeting may be postponed for you to fill in holes in your paperwork.
Attend creditor meeting. The trustee will verify the value of your assets and that you can make the payments you propose.

If satisfied, the trustee will recommend confirmation of your plan. If there are objections, the parties will try to resolve them.
Complete counseling: You must complete a pre-discharge credit counseling course before your case closes. This usually costs $50-$100; you can find accredited providers on the Department of Justice website.

Rebuilding after bankruptcy

By the time you’ve decided to file for bankruptcy, your financial situation — from your balance sheets to your credit score — is likely in ruins. But things will begin to get better once your debts are discharged or reorganized.

You can begin to focus on rebuilding your finances. Building a budget and applying for a secured credit card are good first steps.

Although a bankruptcy will linger on your credit reports for years, you can minimize its effect by working to restore your credit and take control of your finances.

Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email:

This article was updated July 27, 2016. It was originally published Aug. 2, 2013.


Navigating Bankruptcy

What Bankruptcy Costs and How to Pay for It

Paying Off Debt, Personal Finance

What Bankruptcy Costs and How to Pay for It

Paying Off Debt, Personal Finance
What Bankruptcy Costs and How to Pay For It

It’s a classic catch-22: You’re in rough financial shape and need to file for bankruptcy. But between filing fees and the cost of hiring the right bankruptcy attorney, you could end up paying hundreds, or even thousands, of dollars to do so.

Here’s what bankruptcy costs — and how to pay for it.

What bankruptcy costs

You’ll face two expenses: the court filing fees to handle your case, and attorney fees for the bankruptcy lawyer who files your petition, helps you through the means test and represents you in court.

There are several types of bankruptcy. The most common for consumers are Chapter 7 bankruptcy, where most all of your debts will be forgiven; and Chapter 13, which reorganizes your debts into a repayment plan.

 Chapter 7Chapter 13
Filing fees$335$310
Attorney fees*
$500 - $3,500$1,500 - $6,000
Total$835 - $3,835$1,810 - $6,310
*Attorney fees vary greatly; these are approximate ranges.

Filing fees are the same nationwide, but attorney fees vary based on your location, the complexity of your case and the attorney. In general, they’ll be lower if you live in a rural area or have a simple case. A complex bankruptcy case in Manhattan, however, will likely cost several thousand dollars.

If you’re filing for Chapter 13, your court will review your attorney fees unless they fall below the so-called “no-look” level that’s recognized as reasonable. This level varies from one district to another, so check with your local court before hiring an attorney.

How to pay for a bankruptcy

Filing Chapter 13 means you have the financial footing to structure a repayment plan for your debts — including your attorney fees — after you’ve filed.  

But if you’re in enough financial distress that you need to file Chapter 7, you’ll likely need to pay your attorney before he or she files your case. If you can’t afford these costs, you can:

  • Raise the money.
  • Work out a payment plan pre-filing.
  • Go pro bono, which means finding an attorney who will take your case free of charge.

The first option takes creativity and hard work. The others require you to prove financial need, so gather proof of your income and expenses, as well as your tax statements, before meeting with any legal counsel.

1. Raise the money

A few simple steps can help you free up or find money for your bankruptcy.

First: Minimize your outgoing cash. “If you’re still paying your credit cards, stop paying them,” New Jersey bankruptcy attorney John Hargrave says. “You’re just throwing that money away if you’re going to file. Save that money and put it toward your bankruptcy.”

Unsecured debts, such as credit card bills, are wiped out through a Chapter 7 bankruptcy, so it makes little sense to keep paying them if you’re certain about using this debt relief option.

Next, try to earn some additional income. Selling old electronics or taking on a part-time job are two ways to earn some fast cash.

If you’ve already pawned your flat screen and started a dog walking service but still don’t have enough to cover your bankruptcy, try asking family and friends for help. You can also tap into a 401(k) or IRA if you have one. That’s truly a last resort, though, as it could jeopardize your ability to afford retirement.  

2. Work out a payment plan

You might be able to spread out the costs of your attorney and filing fees.

The first step is finding the right attorney. In this case, that means one who has expertise, is a good communicator and charges a fair price — and is willing to receive payment over time. Ask any lawyer you’re considering about the possibility during your initial meeting.

Payment plans vary; some lawyers allow you to spread payments over six months, others three months. Most will want full payment before filing your case. Because Chapter 7 bankruptcy wipes out most of your debts, you wouldn’t be legally obligated to pay your attorney any outstanding fees after filing. That’s just not a sustainable business plan.

But you can still get some benefit, even while you’re making the payments, Hargrave says. Once you officially hire a lawyer, he or she can take calls from creditors on your behalf. When you discuss setting up a payment plan, ask how much of the fee you must pay before the lawyer will begin taking calls.

“When people hire a bankruptcy lawyer, they know the fear of going to the mailbox, the fear of what phone call is going to come next — that evaporates when you hire an attorney,” Hargrave says. “That’s a huge benefit for people.”

Later, your attorney can work with the court to set up a payment plan for your bankruptcy filing fee. The $335 fee can be split into as many as four payments.

3. Go pro bono

You might qualify for free legal services or waived fees if your income is less than 150% of the poverty line for your family size and you’re unable to afford a payment plan.

There are a few ways to find a pro bono attorney. First, ask your local bankruptcy court for information about free legal clinics and local free legal aid resources. If you meet their guidelines, these organizations might be able to offer some help or connect you with pro bono bankruptcy attorneys. But be prepared: Legal aid organizations are often underfunded and overworked. Still, getting on the list with one is a good starting point while pursuing other options.

The American Bankruptcy Institute’s bankruptcy attorney directory can also point you toward pro bono help in your area.

You can also reach out to your state’s bar association. Some firms require attorneys to make pro bono work 10% to 15% of their caseloads. Just don’t pick an attorney simply because he or she is free.

You might feel a little odd asking for free legal representation, but Jim Carman, communications director at the American Bankruptcy Institute, says bankruptcy lawyers are accustomed to the requests.

“They understand that people aren’t coming to them lightly, and they’re going to understand that there’s a certain tightness in the wallet,” Carman says. “If people are in that kind of extreme situation, they really need to seek out a pro bono attorney.”

Lastly, you can hire a petition preparer instead of an attorney if you’re in a hurry to file your bankruptcy. He or she will help you fill out your paperwork for an hourly fee that can be as low as $70. Know that a petition preparer can’t give you the legal advice that an attorney can provide, but this is an option if you just want to file in order to trigger the “automatic stay” that halts collection efforts. 

What about DIY?

If you’re thinking of filing on your own, without any legal assistance, Hargrave advises one thing: Don’t.

“There’s a jeopardy in doing a bankruptcy by yourself,” he says. “Even if you’re a well-educated, articulate person, the law still has a lot of jargon and technical stuff that you, without assistance of a lawyer, could screw up.”

Making a mistake on your paperwork can lead the court to throw out your case, wasting the effort and money you’ve put into it.

Next steps

Bankruptcy is confusing enough, and worrying about how you’ll pay for it makes it even worse. If you’re struggling to pay your filing and attorney fees, these options can help you get on track toward getting your debts forgiven.

From there, you can start to rebuild your credit, work out a budget and hopefully, someday, live debt-free.

Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email:

Navigating Bankruptcy

How to Find a Bankruptcy Attorney

Paying Off Debt, Personal Finance

How to Find a Bankruptcy Attorney

Paying Off Debt, Personal Finance
Cropped shot of two female coworkers talking in the office

Your bankruptcy attorney will serve as your advocate and guide through what is a sometimes confusing process. Taking the time to contact a few lawyers and knowing what to look for can set you on the path toward successfully filing for bankruptcy.

When hiring an attorney to help you file your Chapter 7 or Chapter 13 bankruptcy case, look for expertise, a fair price and a communication style you’re comfortable with.

How to find bankruptcy attorneys to contact

Several online directories promise to help with finding a bankruptcy lawyer in your area. Be aware, however, that many of these directories simply list attorneys in exchange for a fee and don’t offer a guarantee of quality. Bring a discerning eye to any listing you consult.

Start with these two resources:

The ABA site lists lawyers and firms that meets its standards for lawyer referral, and you can sift through the results for attorneys that specialize in bankruptcy. You can also check your state’s bar association for local resources.

The NACBA directory lists bankruptcy attorneys exclusively. The organization is dedicated to helping consumers going through bankruptcy and attorneys who specialize in this area. However, NACBA’s membership criteria are fairly generous, so membership does not necessarily equal quality or experience.

In addition to these directories, ask friends and colleagues for recommendations if you feel comfortable doing so.

Contact a few attorneys who seem qualified and arrange a consultation with each one. Some attorneys offer free meetings, and others will charge a fee of around $35 for this initial conference. Don’t assume no charge means lesser qualifications; starting with free meetings can help you get comfortable interviewing lawyers and may lead you to the one you choose.

At all of the meetings, aim to find out three things:

  • Does the attorney have the expertise to help you?
  • Are the fees are appropriate?
  • Would you feel comfortable working with this person?

Experience and expertise

Successfully navigating the bankruptcy code requires a deep knowledge of this area of law and the experience to know how to use it. A misfiled form or missed deadline could result in your case being thrown out. That’s why finding a specialist is important.

“Going with an attorney who is not specialized in bankruptcy can be very dangerous because they might not understand how to interpret this complicated area of the law,” says Dan LaBert, executive director of the NACBA. “You wouldn’t go to a dermatologist if you had a heart problem.”

Ask the lawyers you contact what specialized training or background they have. Those who have bankruptcy certification from the American Board of Certification have proven they know their way around the bankruptcy code better than your average attorney. An affiliation with NACBA is also a sign that an attorney is committed to advocating for people going through bankruptcy.

Ask the attorneys you meet with how many Chapter 7 and Chapter 13 bankruptcies they’ve handled. And know that a good bankruptcy lawyer will also discuss alternatives to bankruptcy, such as credit counseling, with clients.

Compensation that fits your case

There is no “right” amount a bankruptcy attorney should charge, although generally a Chapter 13 filing will cost more than a Chapter 7. Fees vary from case to case and from one state to another.

You can expect to pay between $500 and $3,500 for a Chapter 7 and between $1,500 and $6,000 for a Chapter 13, LaBert says. The more complicated the case, the more expensive it’s likely to be. Ask about the attorney’s fee structure during your first conversation and make sure you understand what services are included.

California bankruptcy attorney Cathy Moran says the most important thing is making sure you’re getting your money’s worth for your specific situation. “You need to know what’s at stake for you when you pick a bankruptcy lawyer,” Moran says. “If you have very few assets and there’s not much to lose, then you can choose a Smart Car or Ford Escort. But if you’ve got a home with equity or a fight with somebody nasty, you need an Audi or a Lexus — you need some horsepower.”

Communication and compatibility

Before you hire any attorney, ask yourself if you feel comfortable being open with him or her.

“I think that the quality of the communication is important because if you don’t, as the client, feel comfortable … disclosing what you’re worried about, if you keep secrets, it will be a deal killer for your case,” Moran says. Without having all of your information, Moran says, she would “have no way of knowing if my and your assessment of the situation is right.”

You and your bankruptcy attorney have a serious job ahead: working to make sure you can get the best deal for your situation. That’s going to involve hard conversations, and a dedication to open communication will help.

“It really does come down to having a compatible personality with the attorney,” LaBert says. “Your attorney is not going to be your buddy or your pal. They’re going to give you hard advice, and it will often relate to your spending habits. But ultimately the attorney has to make a welcoming environment for the client.”

Be wary of  “bankruptcy mills,” or law firms that handle so many bankruptcy cases that they can’t give yours the time and attention it deserves. If in your first meeting you aren’t able to work one on one with the attorney to air your concerns and talk through your case, you might want to go elsewhere.

Not a DIY project

Keep these qualities in mind throughout your search and take your time.

Although it takes work to find the right lawyer, don’t be tempted to go without one. “I always say ‘pro se, no way’ for bankruptcy,” LaBert says, referring to the legal term for representing yourself.

Both he and Moran agree that if bankruptcy law is too complicated for a dabbling attorney, it’s too complicated for average people to tackle on their own — or at least too complicated to do so successfully.

Finding the right attorney for your situation will allow you to execute this debt relief option successfully, freeing you to focus on restoring your credit and living debt free.

Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email:

Navigating Bankruptcy

Bankruptcy Counseling: What It Is, What to Expect

Paying Off Debt, Personal Finance

Bankruptcy Counseling: What It Is, What to Expect

Paying Off Debt, Personal Finance

Declaring Chapter 7 or Chapter 13 bankruptcy is no small decision, but it may be your best debt relief option if you see no clear route to paying off what you owe within five years.

Bankruptcy is a long and sometimes confusing process; just filing can take months to complete. The federal government requires two sessions of credit counseling: pre-filing counseling to kick off the process and pre-discharge counseling before your debts are forgiven. These sessions will help you understand how bankruptcy works, its lasting effects and how to avoid financial risk in the future.

The counseling sessions don’t take long to complete, and they can be the most painless part of filing for bankruptcy. Here’s what to expect.

Pre-filing counseling

After finding the right attorney for your situation, pre-filing bankruptcy counseling is your first step toward getting the gears of the process turning. If you don’t go through pre-filing counseling before submitting your case to the court, it will be thrown out.

In addition to being an educational course to help you understand the advantages and disadvantages of going through bankruptcy, pre-filing counseling also presents alternatives such as debt management to help you determine whether bankruptcy is the best way to resolve your debt.

“We show consumers local resources they may not know are available,” says Joji Varghese, a credit counselor with Clearpoint Credit Counseling Solutions. “There are alternatives for them to get out of debt on their own. Many can learn how to cut their expenses and save a little bit to pay off their debts without filing for bankruptcy.”

Bankruptcy attorney Lawrence Szabo calls that unlikely, however: “In theory, it’s designed to see if maybe an alternative to bankruptcy could be considered, but that very rarely happens.”

When you finish the pre-filing session, you will receive a certificate of completion valid for 180 days. You’ll need that certificate if you do decide to file for bankruptcy.

Pre-discharge counseling

Pre-discharge counseling, the last step before the court finalizes your bankruptcy and discharges your debts, offers valuable financial education to help you manage your finances in the future.

“It’s focused on income, expenses and strategies for how to help you save money,” Szabo says. “I’ve had a few of my clients over the years say they actually found it quite helpful.”

This class covers much of the same ground as the pre-filing session but with a focus on increasing your financial literacy. You’ll cover topics such as understanding your credit scores, managing a budget and avoiding financial risk.

“If a person is serious about getting out of debt, the pre-discharge course can give them information and tools to avoid getting into the same situation again,” Varghese says.

As with pre-filing counseling, you’ll receive a certificate upon completion. You’ll need to have that certificate before the court will discharge your debts.

How you’ll do it

Pre-filing counseling and pre-discharge education are available only from nonprofit credit counseling agencies approved by the Department of Justice.

Look through the approved agencies and talk with a few credit counselors to find one you feel comfortable with. (Keep in mind you can switch to a different agency for the second session if you like.)

Don’t worry if you don’t find an approved agency near you; most pre-filing and pre-discharge sessions take place over the phone or online. Some agencies, like Clearpoint, do pre-discharge sessions only online.

Before going into either session, gather documents that outline your income, expenses and debt to expedite the process. Expect each session to take between 90 minutes and two hours.

What it costs

The average cost for pre-filing and pre-discharge courses is $25 to $50 each, depending on where and how you do the counseling.

Most of the bigger credit counseling agencies, such as ClearPoint and Money Management International, charge a flat rate of $50 per session. But some states cap the fee for pre-filing counseling at $20, and some agencies offer lower fees for online sessions. For instance, InCharge Bankruptcy Counseling charges $25 for pre-filing counseling online and $15 for its online pre-discharge course.

Many credit counseling agencies will waive the fees if they determine you can’t pay given your household budget. Be sure to get any fees in writing before starting a pre-filing or pre-discharge session.

What happens next

These counseling sessions are just two steps on the journey of eliminating debt through bankruptcy. It’s not an easy or quick fix: Chapter 7 takes three to six months, and Chapter 13 takes three to five years.

If you use the tools provided in the counseling sessions, however, you can begin to erase its effects on your credit upon completing your bankruptcy.

“After you take the second course and your bankruptcy is discharged, you can start rebuilding your credit,” NerdWallet columnist and financial advisor Liz Weston says. “The first step is to save up a little cash for an emergency fund, and then look into credit builder loans and secured cards.”

“If you manage these accounts responsibly, you should start to see your credit scores improving within a year or two,” Weston says. “The bankruptcy will continue to affect those scores for 10 years, but many people can get their scores up to ‘good’ levels within three to five years.”

Sean Pyles is a staff writer at NerdWallet, a personal finance website. Email:

Navigating Bankruptcy

Advertiser Disclosure

How to Rebuild Credit After Bankruptcy

Credit Score, Personal Finance
Advertiser Disclosure

How to Rebuild Credit After Bankruptcy

Credit Score, Personal Finance
With so many websites offering free financial tools, it can be hard to know whom to trust. At NerdWallet, we spend literally 1,000s of hours researching partner offers and following strict editorial integrity to match you with the perfect choice. We even share how we make money so you can enjoy our expert advice and researched recommendations with total clarity and confidence.
How to Rebuild Credit After Bankruptcy

A Chapter 7 bankruptcy gives you the relief of a clean financial slate — but also the worry that you’ll never have decent credit again.

If you were eligible to file Chapter 7, chances are your credit was in tatters. But that’s different from the common misconception that bankruptcy ruins your financial future forever.

The truth is you can begin to restore your credit right away.

Credit score simulator

What happens if…

I pay off this much debt:

Get your score!

Your new score:

Although a bankruptcy will remain on your credit reports for 10 years, its impact will fade with time. You can help the process by offsetting the negative information on your credit report with something more positive.

Start with the basics

At this point, lenders would like to see that you have enough income to pay your current obligations, and have a little left over. A lighter debt burden makes you a more attractive borrower.

Also, lenders won’t have to worry that you’ll file for bankruptcy to get rid of any new debt; you won’t be able to receive another discharge of your debts for eight years.   

Here’s your first order of business: Create a budget to help you stay on top of your finances. The pre-discharge credit counseling you went through before finishing your bankruptcy should have provided information on budgeting, but if not, don’t hesitate to seek help from a credit counseling agency. All nonprofit credit counseling agencies offer free basic consumer help on topics such as budgeting.

Next, begin building an emergency fund. Research by the Urban Institute shows that having as little as $250 in savings for an unexpected expense can protect families from resorting to payday loans or running up credit cards, which can start a new debt spiral.

Plan your post-bankruptcy credit strategy

You might think you’re a pariah in the eyes of lenders and credit card issuers, but that’s not quite true. You’ll have to prove yourself, of course, but it can be done.

Although your goal — building a good credit score — is the same as that of someone starting from scratch, your situation is a little different. Your problem isn’t that creditors don’t know anything about you, but rather that they know a lot. 

First, assess your situation. You can do that by checking your free annual credit reports. Your credit scores are calculated using information in your credit reports, so any inaccurate negative information can make it even harder for you to dig out of debt. If you find errors, dispute them and get them corrected.

Of course, there will be negative information that is accurate. Your reports will show your bankruptcy for 10 years. Also, late payments and debts that go to collection remain on the reports until seven years after the delinquencies. A Chapter 7 filing wipes out debts, but it doesn’t wipe your credit reports clean.

Second, check your credit score. There are several ways to get a free credit score, from personal finance websites like NerdWallet and some credit card issuers. It’s smart to track your credit score month to month, and it’s crucial to look at the same score each time — otherwise, you’ll get a not-useful apples-to-oranges comparison. Pick one type of score to track and stick with it.

Cleaning up your credit reports and knowing which credit score will be seen by lenders helps you know which credit products to apply for.

Seek a product that suits your situation

Your pre-bankruptcy payment history will make you look like an extremely risky borrower to lenders. You can fix that problem by providing extra assurances that they won’t lose money by lending to you. Here are four ways to improve your financial profile. That will help you get credit and work on restoring your score:

Secured loan: This comes in two varieties, and most often is offered by credit unions or community banks. One kind of secured loan involves borrowing against money you already have on deposit. You won’t be able to access that money while you’re paying off your loan. The other kind can be made without cash upfront, though the money loaned to you is placed in a savings account and released to you only after you have made the necessary payments. In return, the financial institution agrees to send a report about your payment history to the credit bureaus.

Secured credit card: This kind of card is backed by a deposit you pay, and the credit limit typically is the amount you have on deposit. A secured card often has annual fees and may carry high interest rates, but you shouldn’t need it for the long term. It can be used to mend your credit until you become eligible for a better, unsecured card.

Be aware that you can be rejected for a secured card. Read the requirements carefully; you’ll want to be almost certain you can get approved before you apply for one, because each credit inquiry can cause a small, temporary drop in your score. This decline will be more than offset if you get a card, use it lightly, and pay the debt on time.

NerdWallet credit card expert Sean McQuay recommends applying for a secured card at a credit union or other local bank. “They tend to be much more lenient with credit history, and many will be happy to work with you to build your credit profile,” he said. “One big caveat, however: Before applying, make sure the bank or credit union reports credit activity to all three credit bureaus. Make sure your good credit behavior counts.”

Co-signed credit card or loan: This can help your score, but you need to have a friend or family member with good credit history who is willing to co-sign for you. It’s a big ask: A co-signer is risking his or her credit reputation for you, will be on the hook for the full amount if you don’t pay, and may face limits on personal borrowing because of the additional debt obligation. A co-signed card or loan can damage relationships if you don’t pay as agreed.

Authorized user status: If asking someone to co-sign is too much, you could instead ask to be an authorized user on that person’s credit card. But make sure the credit card will report payment activity by authorized users to the credit bureaus, or it won’t help build your score.

This route won’t lift a score by nearly as much as the other methods, because authorized users don’t have ultimate responsibility for repaying debt. (It is much more likely to help someone who has a “thin file” with little credit information in it than someone who has a file chock-full of negative information.) But this path won’t hurt, so you may want to pursue it.

Next steps

Once you get a lender to extend credit, be vigilant about paying on time. Keep your credit card balances low relative to card limits — less than 30% is typically advised, but less than 10% is even better.

You’re already seeking redemption, so you can’t put yourself in a position where you’re begging for forgiveness for a late payment or struggling to keep up with mounting credit balances.

When your recent history finally shows you are a good credit risk, your vigilance in restoring your credit reputation will pay off.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @BeverlyOShea.

This article was updated June 20, 2016. It was originally published Dec. 17, 2014.