Rebuilding Credit and Improving your Credit Score after filing Bankruptcy
One of the most common questions bankruptcy clients (and those considering filing a bankruptcy) have, is "What will this do to my credit score, and how can I rebuild my credit score after filing a bankruptcy case; Can I buy a house after a bankruptcy; can I buy a car after a bankruptcy." I will address these important questions and issues on this page.
Bankruptcy is a solution to allow people filing for bankruptcy relief, to receive a "fresh start," Order of Discharge of Debts, from the bankruptcy court. This Order of Discharge of debts creates a federal law injunction against creditors, or later-assigned collection agencies, attempting to enforce these debts against the person who filed the case, after an Order of Discharge. The Order of Discharge will only have legal effect on debts that are subject to dischargeability under the bankruptcy code. The fresh start is a step towards rebuilding credit for individuals and or businesses who filed for bankruptcy relief. There are additional steps that individuals and businesses can take to actively improve their credit scores and rebuild their credit faster, after a court Discharge Order has been issued. I will discuss these steps below.
- Upon discharge, You may need to send all of the credit reporting agencies your personal bankruptcy case Order of discharge, and the Schedules D, E and or F, from your bankruptcy petition, if the pre-bankruptcy negative credit history is still being reported for certain creditor accounts, instead of a reference to your bankruptcy. You will follow the dispute process each credit reporting agency has to resolve inaccurate credit history.
- Your income to debt ratio will immediately be improved after a bankruptcy order of discharge, and some creditors will give you a better loan risk assessment given your inability to refile a new bankruptcy case for a 4-8 year period. This may make you a better candidate for a loan even after a recent bankruptcy case filing.
- You will want to rebuild your credit history and improve your credit score by incurring a minimal amount of new credit. Your credit score will increase as it reflects new, on-time payments, after the bankruptcy has been discharged. These payments may be auto payments, payments on a mortgage, or payments on a secured credit card. You can open a secured credit card by going to your local bank or credit union and giving them $500.00 -$1000,00, of your money to hold as security against the credit card balance. A secured credit card will have a better interest rate than an unsecured credit card. Remember to pay the monthly payment on time to establish the new credit history, and do not pay it off early. It is beneficial to only use about 1/3 of the available credit on a secured credit card to help improve the credit score.
- Each year that passes after your bankruptcy case was discharged and closed will also lead to an increase in your credit score. Credit reports will report a Chapter 7 bankruptcy case for 10 years after the bankruptcy was filed. Credit reports will report a Chapter 13 bankruptcy case for 7 years after the bankruptcy was filed. You may need to contact the credit reporting agencies yourself to dispute the bankruptcy being listed in your credit and ask that it be removed from the report, if these time periods have already run.
- Maintaining a stable, consistent employer and home residency address can also help increase your credit score.
- You can apply for an auto loan after you have been discharged in a Chapter 7 or Chapter 13 case. Debtors in a Chapter 13 case can apply for an auto loan while the case is open, if they have their Chapter 13 trustee’s approval. The interest rate will often be around 30% after a recent bankruptcy, so be sure and finance the lowest priced, mechanically sound auto that you can. Keep the monthly payment low and ask if you will receive credit history reporting to the 3 credit reporting agencies, with the loan you are applying for. You can also consider saving money towards purchasing an older auto, and then upgrading that auto once your credit score has improved as your interest rate will be lowered as your credit score improves over time. Timely payments on the auto loan (being reported to your credit reporting agencies) will increase your credit score.
- You can apply for a home loan between 2 -4 years after filing a Chapter 7 bankruptcy case, and 1-2 years after filing a Chapter 13 bankruptcy case. The time variation will depend on your applying for a FHA versus a conventional mortgage. Contact a mortgage loan officer or your bank or credit union’s loan officer, soon after a bankruptcy order of discharge, to establish a game-plan and a timeline to help restore your credit score to the level you will need for successfully receiving a mortgage loan after a bankruptcy filing.
- Create a budget and plan to start a savings account. Put a portion of your income into a savings account every month. The ideal emergency savings account fund will cover all living expenses for 3-6 months for your household. You can start additional savings accounts for specific item purchases and or plans, such as a car account, a vacation account, or a Christmas present account. Learn to budget extra income to some categories such as medical that can be higher some months than others.
- Purchase items when the older item wears out and delay replacing personal property when you can. Make choices of buying essential items versus non-essential items. Consider using stores that sell used consumer goods for clothing and other personal property.
- Review your credit report every 1 – 3 months to remove all incorrect credit history quickly by using the credit reporting agency dispute process. Use a company that will not charge you for this credit report access.
- Get a credit report from all 3 credit reporting agencies annually. Annualcreditreport.com The government website for a free annual credit report is listed above. Remove all incorrect credit history quickly by disputing that content.
- Pay your current bills on time to avoid late fees and help improve your credit score.
- Use amortization calculators (available online) to help assess the true cost of a purchase including the interest. If a purchase has a high interest rate consider delaying the purchase until you have a higher credit score. The higher the credit score the lower the interest rate will be. This will help on future auto loan and home purchases.