Home Editor's Choice Re-establishing credit after bankruptcy

Re-establishing credit after bankruptcy

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Filing bankruptcy is a humbling experience for most people and an embarrassing one for all.

Sure, you’ve gotten rid of all those high interest credit cards and the old doctor and dentist bills that were eating you alive but where do you go from there? Your credit score is only slightly higher than your shoe size and nobody is going to ever trust you with a credit card again, right! WRONG!! I’ll explain in a few moments.

First, let’s go over some of the pro’s and con’s of having your unsecured debts discharged under a Chapter 7 bankruptcy.

Here are some of the cons:

1) Your credit score takes a dramatic hit.

2) The record of the bankruptcy stays on your credit report for 10 years

3) You can not file for protection under Chapter 7 again for another 6 years

Now, here are some of the pro’s:

1) Your score was already probably at a low level since you were most likely running past due on your bills.

The difference in your credit score may not be as dramatic as you think.
2) Even though the record of filing for protection under Chapter 7 stays on your record for 10 years, it is

weighed by the credit companies against your ongoing credit.

3) You can’t file again for 6 years and the credit card companies know that. Why is that so important? Well, face it, the credit card companies are greedy! When they see you have eliminated all your unsecured debt and can’t dump your new debts again for 6 more years, a whole new set of credit rules apply. Suddenly, you have a clean slate and you will soon be getting offers from many banks (yes, even those banks whose balances got written off through the bankruptcy) to carry one of their credit cards.

That’s the only way they are going to recover any of the money they lost on you in the first place.

But, the plot takes another turn here and a dangerous one at that.
Many of these credit card companies will offer you a respectable interest rate (even zero percent for a while) to entice you to take advantage of their offer. Before you jump at the opportunity, read the back of their information sheet. This is where all the surprises are hidden. Are you really getting that low rate or is it adjusted monthly according to some mysterious calculation? Is there an enormous annual fee (sometimes as high as $175 per year) that immediately gets billed to your card and reduces your available credit limit (this one really hurts when they only give you a $300 credit limit)? And, once they’ve hit you with their fees and interest, what happens if you go over your limit or miss a due date? Many companies jack your rates back up to 27%+.

There is help on the horizon.

Some banks offer secured credit cards. These are a fantastic way to re-establish your credit because they look and act exactly like a regular credit card except they are secured by a savings account with a comparable balance. The bank pays you interest on your savings account but has the security of being able to use your deposited funds as collateral to cover your credit card balance. These cards also have lower rates and give you the extra credit reference of having a savings account as well as a credit card.

These banks will periodically review your account to see if they can increase your credit line (usually after a year of good payments) or you can simply deposit more money in your account and ask for your limit to be raised accordingly. Eventually, a few years into your new credit, they may even advise you that security is no longer needed and the savings account funds are available for you to use at your discretion.

Either way you decide to go to re-establish your credit remember, you got yourself into trouble the first time so don’t repeat the process.

Buying a Home After Bankruptcy

Job loss, foreclosures and other economic hardships have caused many to struggle to make ends meet, forcing many into bankruptcy. But what happens after? Is it possible to obtain a mortgage loan after the bankruptcy has been discharged? Contrary to popular belief, it is not only possible, but a very real fact that one can get a mortgage loan or refinance after your bankruptcy. Whether it takes six months or longer, the following are important tips to follow that will improve one’s chances of obtaining a mortgage loan after bankruptcy:

Pay All Debts on Time

Continue to pay all items not discharged in the bankruptcy, such as car loans, home loans, or student loans. Be sure to pay all other bills on time, including utility bills and medical bills. This establishes good payment history and will reinforce a credit history.

Get a Credit Card

Obtaining a credit card may be difficult after a bankruptcy, especially if applying for an unsecured credit card. Opt instead for a secured credit card. A secured card will require a cash collateral deposit, which will become the credit line and will determine how much can be charged on the card. Develop a good relationship with the bank providing the card by making timely payments. Secured cards should not carry balances; instead, they should be used as a tool to reestablish credit.

Making small purchases on the card and paying the card off every month will show excellent credit history. Be aware that secured credit cards usually have higher interest rates, some companies will charge exorbitant fees, and some may even charge an application fee, so it is important to shop around first.

If able to acquire an unsecured credit card, be careful of the amount of credit card debt used. Too much debt may make it more difficult for someone to qualify for a mortgage loan because they may appear to be a credit risk. One or two revolving credit cards are sufficient, as long as timely payments are made.

Clean Up the Credit Report

Get a copy of the credit report and check it for inaccuracies and errors. Often after a bankruptcy, accounts that should have been included in the bankruptcy are still open and showing as late or in default on the credit report.

All mistakes on a credit report will have to be fixed, which will involve notifying the creditor and sending disputes to the three major credit reporting bureaus, TransUnion, Experian, and Equifax. This may take time, so be sure to pull a copy of the credit report as soon as the bankruptcy is discharged and then once a month to be certain that new inaccuracies that appear can be taken care of promptly. Removing errors will improve debt-to-income figures and will make it easier to qualify for a mortgage loan.

Although a bankruptcy can remain on a credit report for up to ten years, this can be mitigated immediately by adopting responsible credit habits. Lenders will look at the debt-to-income ratio to determine creditworthiness and ability to repay a mortgage loan. Applicants must also have an established job history, and lenders may ask for a copy of paystubs and/or tax returns to show stable employment history and income. Rebuild the savings account. Having a large downpayment will enable applicants to obtain a better interest rate.

If a loan application is rejected, find out why and fix the problem. Some lenders have strict qualification policies regarding bankrupt borrowers while other lenders have special programs for people with bankruptcies. This process will require diligence, and most of all, patience.

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