Definition

• Bankruptcy is a legal action that absolves a person of most owed money. Consumers usually file Chapter 7 or Chapter 13 bankruptcy, according to the FTC. Chapter 13 requires some repayments, while Chapter 7 totally wipes out most debts. The FTC explains that Chapter 7 requires liquidation of most large assets, while Chapter 13 lets people keep more of their possessions.
  
  

Effects

• Bankruptcy is a sign of bad financial management because it shows that a consumer got too deeply into debt to get out any other way. Creditors shy away from people with recent bankruptcies because they have legally demonstrated that they cannot pay bills. Insurers and employers also view bankruptcy negatively, the FTC warns. Bankrupt individuals may have insurance, employment and credit applications denied or pay higher fees and interest rates for insurance policies, loans and credit cards.
  
  

Time Frame

• Both Chapter 7 and Chapter 13 bankruptcies appear on TransUnion, Equifax and Experian credit reports for ten years. Credit rebuilding efforts should start as soon as a bankruptcy case is concluded, Liz Pulliam Weston of MSN Money advises. Creditors want proof that a person is sincere about handling accounts properly in the future and has the means to do it. Often credit is completely rebuilt by the time the bankruptcy is erased.
  
  

Solution

• Credit rebuilding involves obtaining and using new accounts, according to Pulliam Weston. FICO, a major credit score firm, explains that payment history has the largest effect on a credit score, followed by debt owed and credit limits, credit history length, number of new accounts and account types. Credit rebuilding should focus on getting at least one revolving account (like a credit card) and an installment loan (like a personal loan). Keep the balances low and make every payment when it is due. Keep new credit cards open so they eventually create a long-term history.
  
  

Considerations

• Bankrupt individuals who cannot get traditional credit immediately after bankruptcy can often obtain secured credit cards, according to Pulliam Weston. They open a bank account in exchange for a credit card with a limit equal to the deposited balance. The secured card issuer reports account activity in the same way as traditional card issuers. A good secured card history eventually qualifies the account holder for traditional cards and loans, and the bank usually converts the secured account into a regular one within 12 to 18 months, Pulliam Weston explains.