Credit Repair
If you carefully work to rebuild your credit
after your Chapter 7, Chapter 11 or Chapter 13 bankruptcy, you could
qualify for almost-normal rates, even a mortgage, in a year after your
discharge from your bankruptcy!
When you come out of your bankruptcy there are a couple of things to
keep in mind:
-
Nothing is
"forever."
A bankruptcy legally can remain on your credit report
for up to 10 years, but its effect on your credit score can start to
diminish the day your case is closed. You need to behave
responsibly with your credit habits, i.e. pay your bills on time, if
you have credit cards just use a small portion of your available
credit and do not apply for too many cards too quickly - this
actually hurts your credit score. -
You have to get and use
credit to build your credit score. Living on a cash-only basis
may be a smart choice for those who really can't handle credit. But
if you want to rebuild your credit score, you can't sit on the
sidelines.
Learn from your mistakes
Although repeat bankrupts show that getting
credit after a Chapter 7 or 13 filing is possible, you shouldn't want to
emulate those who file more than once.Their debts and credit history often mean they're paying out big bucks
in high interest payments during the time when they're prohibited from
filing another bankruptcy.
The 2005 bankruptcy law provides that, under Chapter 7, eight years
must elapse before you can re-file. If you go for Chapter 13 after a
Chapter 7, you must wait four years. Going from one Chapter 13 to
another, two years must elapse.
And most people can't file for Chapter 7
liquidation if they have significant assets to protect, such as home
equity or savings. So these folks who are repeatedly going broke often
have little to show for all the money that's leaving their pockets.
Instead of building wealth over time, they're losing ground.
Instead, use your bankruptcy as a wake-up call
to figure out what's wrong with your finances and fix it.
-
If your problem was
overspending, you'll find plenty of information on this site about
creating and sticking to a budget.
-
If you didn't have enough
savings to survive a job loss or other setback, get serious about
establishing an emergency fund.
-
If you were sunk by medical
bills, seek a job with insurance coverage or check to see if your
state offers coverage.
Clean up your credit report
One of Burleson's biggest problems is that her
credit reports still show several accounts as open and overdue -- when
in fact they were closed and the obligations wiped out as part of her
bankruptcy.
In order for her credit to recover, she needs
to contact the credit bureaus and insist that those accounts be properly
reported as "included in bankruptcy."
If you have other serious mistakes on your
credit report, those need to be corrected as well. Your credit score is
based on information in your credit report, so errors on your report can
seriously dampen your score.
Get a secured credit card
You need two types of credit to quickly
rebuild your credit score:
-
Installment: Auto loans,
student loans or mortgages
-
Revolving: Credit cards or
home equity lines of credit
Most recent bankrupts have trouble qualifying
for a regular, unsecured credit card. So the best solution usually is a
secured card, which generally gives you a credit limit that's equal to
an amount you deposit at the issuing bank.
Typically, that's $200 to $500, which may seem
like a pittance compared to the credit limits you enjoyed before your
bankruptcy. But don't make the mistake of using your available credit.
Maxing out your credit cards hurts your credit score.
You don't want to charge more than 30% or so
of your credit limit, and you want to pay the balance off in full each
month. Light, regular use of a credit card is what helps build
your credit.
And contrary to what you might have heard, you
typically don't need to carry a balance or pay credit-card interest to
build your score, since the leading credit scoring formula doesn't
distinguish between balances that are paid off and balances that are
carried month to month. Get in the habit now of not charging more than
you can pay off every month; your credit score and your finances will be
the better for it.
You also shouldn't just grab any secured card.
Look for the following:
Get an installment loan
If you still have student loans (which
typically aren't dischargeable in bankruptcy), you can use them to
rebuild your score. Make your payments on time, all the time, and try to
pay more than you owe whenever possible. Next to making on-time
payments, paying down your existing debt is one of the best ways to
improve your credit score.
Ken of Chicago took this to heart, making
double or triple the minimum payments required to retire his $23,500
student loan debt within three years of his bankruptcy filing.
"The fact that I had to repay my student loans
(rather than having them discharged) might have helped me in the long
run," he said.
Ken's credit has recovered enough that he's
scheduled to close escrow on a condo purchase later this month. He
qualified for a 6.4% interest rate on a 30-year fixed mortgage.
Another option: a mortgage. Interestingly, it
can sometimes be easier to get a mortgage after a bankruptcy than to get
other types of installment loans.
You may be able to qualify for a high-rate
loan as little as six months after a bankruptcy, but you're probably
better off waiting until you can qualify for an FHA loan. You can
typically get one just two years after your bankruptcy case has closed,
as long as you've maintained good credit habits since then. FHA loans
have interest rates that are usually only half a percentage point higher
than regular mortgage rates.
Just make sure
you really can afford a home before you buy one. Many people wind up in
bankruptcy court because they stretched too far to buy a house and can't
keep up with all the attendant costs of homeownership, said bankruptcy
expert Elizabeth Warren of Harvard University.
Auto loans can also help you rebuild your
credit -- just be prepared to pay nose-bleeding rates at first.
"My first vehicle out of bankruptcy (had an
interest rate of) 21%," said Chance Nelson of Indianapolis, who applied
for the loan just a few months after his debts were discharged. "After
paying this for about 2 years, I went and traded it in and purchased
another (at) 13.99%."
Nelson refinanced this second loan a year
later at 7.95%. Today, five years after his bankruptcy filing, Nelson is
paying a reasonable 6% rate for his auto loan.
If you go this route, try to make a big down
payment and choose a loan that doesn't have a prepayment penalty. That
way, you can refinance the car to a lower interest rate as your credit
improves.
Just don't forget: The key is to make sure all
your payments are made on time, all the time.
|
To set
up a free initial consultation, contact one of our
Detroit Bankruptcy Attorneys today
877-ABW-CAN-HELP (877-229-2264)
There is a light
at the end of the tunnel.
There is...
|
