By John Lee
Many of my clients ask me how they can restore or rebuild their credit after having filed a bankruptcy. The process of rebuilding one’s credit score after bankruptcy will take many months, and in some cases many years. The Chapter 7 Bankruptcy will stay on the debtor’s credit report for ten years. The Chapter 13 Bankruptcy will stay on the debtor’s credit report for seven years. Negative account information typically stays on the debtor’s credit report for seven years after being reported.
Just because a bankruptcy will stay on your credit report for between seven and ten years does not mean you need to wait that long to rebuild and repair your credit. There are definite steps that you can take after filing bankruptcy to help quickly rebuild and repair your credit. Many former debtors make the mistake of “staying away” from credit after filing bankruptcy. Having no credit history is almost as bad as having a poor credit history. Lenders want to see that you have a track record of repaying debts, not that you have a track record of not borrowing money.
After your bankruptcy case has been closed, you should apply for a secured credit card. Typically, a secured credit card is one where you put a deposit down in an amount equal to the credit line the lender is giving you. After paying on your secured credit card for a while ask to be upgraded to an unsecured credit card. You can also apply for a retail credit card or gas card; typically these have lower credit limits and can only be used at one store. If you do not already have one, make sure to open a checking and savings account after your bankruptcy is completed. These are very reasonable ways to begin to repair your credit.
Once you qualify for an unsecured credit card or retail credit card, make sure that you never max out the credit line. For example, if you have a $1,000.00 credit limit, never charge over $500.00 on the card. When you get the bill, never pay it down to a zero balance. You should pay most of the bill, but leave a $50.00 to $100.00 credit balance. If you pay the balance off completely every month it may appear that you are not really using credit. I advise my clients to work their way up to five credit lines that are all reporting to the credit agencies. A credit line could be any debt acquired after filing bankruptcy; it could be a credit card, car loan, installment loan, retail credit card or furniture loan. Of course you should make all payments in a timely fashion. One trick to ensuring you are never late on an installment loan payment is to make an extra payment as soon as you get the loan, then you are always one month ahead. If you run one month ahead for the entire life of the loan you never run the risk of your monthly payment being a few days late.
A few years ago, when the economy was doing well, I saw people reestablishing their credit in as few as 18 months after filing a bankruptcy. Before the real estate market meltdown lenders were willing to make loans to anyone, even people that had just got out of bankruptcy. Now, banks are must less willing to loan money and it will take much longer to rebuild your credit.
Even now, lenders will be willing to make loans to folks coming out of bankruptcy for automobiles. In many cases the lender will charge extremely high interest rates and retain a security interest in the automobile. The Lender is taking virtually no risk because he is charging such a high interest rate and retains the right to repossession. The problem is the debtor, who must have a car to get back and forth to work, is essentially forced into a situation where he has to pay thousands of dollars in interest payments for a used car.
If you must buy a car before your credit is restored, and you are looking at paying an outrageous interest rate, I strongly suggest that you purchase the least expensive car available. If you must pay a high interest rate, you are far better off paying it on a $2,000.00 car, rather than a $10,000.00 car. You will pay off the high interest rate car loan for a small amount of money a lot quicker and, hopefully, by then your credit will have improved enough to qualify for a low interest rate loan on a nicer car.
You should pull your credit report once a year to look for mistakes. If you see mistakes on the report, then you should report them to the credit bureau immediately. The major credit bureaus have admitted to making billions of mistakes on consumer credit reports. The Credit Bureaus are required to investigate and delete any in accurate negative information on your report.
Many debtors think that repaying loans that existed prior to filing bankruptcy will help their credit reports. I do not believe that making payments on an account that was included in a bankruptcy will substantially improve your credit. The best way to establish good credit after bankruptcy is to obtain brand new credit lines after the bankruptcy is completed.
When a debtor files bankruptcy and surrenders real estate back to the mortgage company, often times the mortgage company will conduct a foreclosure sale on the property. This foreclosure sale may take place months, or even years, after the bankruptcy depending on the mortgage company. The foreclosure sale may appear on the credit report years after the bankruptcy takes place. This will also negatively impact your credit score. Another problem that arises as a result of the mortgage company waiting months or years to conduct the sale is the debtor is responsible for HOA fees and taxes until the foreclosure sale takes place. In order to build good credit the debtor must pay the HOA fees and taxes on the property until the foreclosure sale or Deed in Lieu takes place. If you are in a situation where you are surrendering a house that has HOA fees, you should consider staying in the house until the foreclosure or renting the house for enough to cover the HOA fees and taxes until the foreclosure sale.
In summary, the way to improve you credit score after bankruptcy is to establish a good payment history on up to five trade lines that report to your credit bureau; to stay away from high interest rate loans with large principle balances and check you credit report regularly and report any inaccuracies. If you have overwhelming debt, the first step to improving your credit score may be to file bankruptcy. The attorneys at John W. Lee, P.C. will offer you a free initial consultation to help you decide if bankruptcy is right for you.
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