Bankruptcy can reduce or eliminate your debts, but it comes at a cost. For starters, the process of filing for bankruptcy can be difficult and time consuming. You will also have to pay court fees and probably legal bills.

You don't need to use an attorney to file for bankruptcy, but most bankruptcy experts recommend hiring one. You may be able to find free or discounted legal representation if you can demonstrate that you lack the resources to pay for it.

After you've survived the initial cost of filing for bankruptcy, there is the aftermath. Prepare yourself for years of repair work. Here's what to expect.

Your Credit Report Tanks

Bankruptcy's greatest impact is the damage it does to your credit report. Your low post-bankruptcy standing can affect your ability to obtain credit in the future, including getting a new credit card, a car loan or a mortgage. It could also hurt your chances of landing a job or renting an apartment, since some employers and landlords will consult your credit report as a way of checking on your dependability. The premiums you pay for car and homeowners insurance could be affected, as well.

While bankruptcy can erase some debts, it will not remove them from your credit report. In fact, your report will now indicate that they are included in the bankruptcy.

Your Credit Score Takes a Hit

Bankruptcy will also have a negative impact on your credit score, a number that is based largely on your credit history. The worse your history, the lower your score.

According to Fair Isaac Corporation (FICO), the company behind the widely used FICO Score, a bankruptcy is considered a “very negative event” and will be a factor in your score for as long as it remains on your credit report. That means up to 10 years in the case of a Chapter 7 bankruptcy and up to seven years in the case of a Chapter 13 bankruptcy. However, FICO says, the impact of a bankruptcy on your credit score will gradually diminish over time.

Bankruptcy is not the only negative information that your credit report can contain. It may also reflect late payments, tax liens, civil judgments against you and whether any of your debts have been turned over to a collection agency. So, as FICO notes, “someone with many negative items already listed on their credit report might only see a modest drop in their score.” If you have maintained a stellar credit record prior to filing for bankruptcy, however, you are likely to see a significant drop in your score.

It's on the (Public) Record

In addition to your credit report, bankruptcy is a matter of public record, available online through the federal Public Access to Court Electronic Records (PACER) service. Because of that, future creditors or other interested parties will still be able to find out about it, long after it has disappeared from your credit report.

So, while bankruptcy is often portrayed as providing people with a fresh start, it can take years to erase the damage. A 2008 study by researchers at Ohio State University found that in terms of income, homeownership and net worth, people who filed for bankruptcy needed 10 to 20 years or more to catch up with their peers who had never filed.

One clear takeaway is that bankruptcy is not to be entered into lightly. Fortunately, there are alternatives short of bankruptcy that you should consider first, including trying to negotiate with your creditors out of court.

Mitigating the Impact

While bankruptcy will remain on your credit report for years, there are some steps you can take, as soon as you are able, to begin to restore your financial standing.

Catching errors. Begin by paying close attention to your credit reports. By law you are entitled to one free copy of your credit report every 12 months from each of the three major credit bureaus: Equifax, Experian, and TransUnion. By staggering your requests – asking for one every four months from a different bureau – you can obtain free reports throughout the year. You are also entitled to a free credit report if you have been turned down for credit, insurance, or employment as the result of information in your file.

To obtain your free credit reports, go to the official website created for that purpose: annualcreditreport.com or call 877-322-8228. Beware of other websites that promise “free” credit reports.

If you wish to obtain credit reports on a more frequent basis, you can also purchase them directly from the bureaus. For about $40 you can get a combined report with information from all three.

Once you have obtained your report, look for any errors. In particular, FICO suggests making sure that any accounts that were not included in your bankruptcy filing are not mistakenly listed as part of it. You should also check for any other errors, including accounts you don’t recognize, which could be a sign of identity theft.

If you find an error, you should notify both the credit bureau and the company involved, such as a credit card issuer, in writing, according to the Consumer Financial Protection Bureau. Under the federal Fair Credit Reporting Act, the credit bureau is required to investigate the matter, usually within 30 days, and notify you of its findings. Click here for a sample error-disputation letter from the Federal Trade Commission website.

Removing the evidence. Make sure that the bankruptcy is removed from your credit report at the appropriate time. As noted above, that varies by type of bankruptcy: Generally, Chapter 7 will be removed by the end of 10 years; Chapter 13, by the end of seven years.

Rebuilding your record.  Reestablishing your creditworthiness after a bankruptcy can take a while. A good place to start is by paying all your bills on time, which will be reflected on your credit report going forward.

To show that you can handle credit responsibly, many experts suggest obtaining and using a new credit card. A conventional credit card could be difficult to qualify for under the circumstances, so you might instead need to apply for a secured credit card.

With a secured card, you deposit money in a bank as collateral. You can then use your card for purchases up to the amount in your account, or some specified percentage of it. By making timely payments, you will begin to add more positive items to your credit report; you will also have the use of a credit card, which can be a convenience, if not a necessity, for many kinds of transactions. After a period of demonstrating that you have handled the secured card responsibly you may qualify for a conventional credit card.

You can obtain a secured card at many banks and credit unions. Beware of offers from companies promising to help you get a credit card despite your financial history. They may simply be scam artists, according to the National Consumers League.

Make sure the card issuer will report your payments to a credit bureau, which is, after all, your main reason for wanting a secured card in the first place. Also find out about fees, which can vary widely and are sometimes exorbitant.

The Bottom Line

There's no question that your credit history will be severely damaged after bankruptcy, with unpleasant consequences for your ability to get credit or loans at reasonable rates. It could even keep you out of a job or an apartment you would otherwise have gotten.

The best you can do is work very hard to rebuild your credit and live through this temporary glitch in your financial life. With effort you can push past it and out the other side.

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