Dear Penny: I’m About to File Bankruptcy. What Should I Expect?

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Dear Penny,

I am about to file for bankruptcy. My lawyer tells me if I continue to keep my home and car payments current that in 24 months my credit score will increase. 

During that 24 months, it sounds like I must save and always try to have cash on hand to meet living expenses. 

My credit card debt of about $50,000 became impossible due to rising interest rates. I take no pleasure in this decision but finally realizing I could no longer keep afloat. 

My pension and Social Security payout is now sufficient for monthly living. Giving up my debt makes me feel very sad, but it’s the only solution available. Please advise what happens after the filing.


Dear S.,

Bankruptcy has an apocalyptic effect on your credit, as you’re probably aware. It’s not uncommon to see your credit scores drop by 200 points or more. 

Yes, making on-time mortgage and car payments will help boost your score gradually.

But I’m not so concerned about the hit your credit is about to take. What gnaws at me is that it sounds like you’re only worried about saving money and having cash on hand during the 24 months your lawyer estimates it will take you to rebuild your credit.

Saving money and keeping a healthy stash of cash on hand aren’t goals you save for that post-bankruptcy period when credit is really hard to access. They’re lifelong habits we all need to establish — but let’s get back to that after we talk about what happens when you file bankruptcy.

Your credit card debt will typically be discharged by bankruptcy. But even if you have a zero balance on a card, there’s a good chance your credit card company will cancel the card when it learns you file bankruptcy. Why? 

Basically, a bankruptcy cancels all your contracts, including your credit card agreements. Without a contract, your credit card company can’t require you to pay back the money you charge, so it sees you as a high risk for defaulting.

So yes, it is especially important to save money now if you can, knowing that there’s a good chance you won’t be able to use a credit card in an emergency for at least a while. If you have any savings, talk to your attorney about whether your state’s laws allow you to exempt some savings from bankruptcy proceedings.

As for the impact on your credit: A Chapter 7 bankruptcy stays on your credit reports for 10 years after the date you file; a Chapter 13 drops off after seven years. 

But the effect is most severe in the first year or two after bankruptcy. Your credit score can rebound long before the bankruptcy record disappears from your reports. Many people see improvements within a year or two, so the 24-month timeline your lawyer suggests sounds reasonable.

Opening a new credit card and paying off the balance in full each month will typically help, as will making on-time payments on all your accounts. After your bankruptcy is discharged — which usually takes three or four months for Chapter 7 and three to five years for Chapter 13 — you can start applying for credit again, but don’t be surprised if you’re denied at first.

There’s a good chance that you’ll need to start with a secured card, a type of credit card that requires you to put down a security deposit and use that as credit.

But now is not the time to be thinking about credit cards. Your top priority is to make a budget — one in which your income exceeds your expenses and you have a category earmarked for saving. Make a plan you can stick to long after you’ve re-established credit.

I think you’re in a good position to do this: You have enough income to pay for your monthly expenses, and it sounds like you’ll be able to keep your home and car in bankruptcy. You don’t need credit to survive.

When used correctly, bankruptcy can give you a clean slate. If you replace the patterns that got you into debt with healthy new habits, like spending less money and saving each month, you will get through this — and your finances will be so much stronger.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about debt to [email protected].