Rebuilding Credit And Improving Your Credit Score After Filing Bankruptcy
Many people avoid filing for bankruptcy relief due to the fear they will never be able to obtain credit again or due to concerns about the impact bankruptcy will have on their credit scores. Notably, credit scores are often low for individuals who may benefit from bankruptcy.
At The Law Office of Kim Covington in Eugene, Oregon, I focus exclusively on bankruptcy law. My practice is founded on the idea that every person should have the information they need, without judgment, to understand if bankruptcy is the right choice to conquer debt problems. My practice includes providing straightforward guidance to help people overcome the effect that common myths about bankruptcy can have and to allow clients to obtain the debt relief they deserve.
Common questions bankruptcy clients have include: What will this do to my credit score? 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 Intended To Provide A New Beginning
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 court order creates a federal law injunction against creditors, or later-assigned collection agencies, attempting to enforce these debts against the person who filed the case.
The order from the bankruptcy court will have a legal effect only on debts that are subject to dischargeability under the Bankruptcy Code. The fresh start is a step toward rebuilding credit for individuals and businesses that file for bankruptcy relief. Individuals and businesses can take additional steps to actively improve their credit scores and rebuild their credit faster. I will discuss these steps below.
- Upon discharge, you may need to send all of the credit reporting agencies your personal bankruptcy 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 improve immediately 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 four to eight years. This may make you a better candidate for a loan even after a recent bankruptcy 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 it $500 to $1,000 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 make the monthly payment on time to establish the new credit history and do not pay it off early. It is beneficial to use only about one-third 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 and a Chapter 13 bankruptcy case for seven 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 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 percent 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 three credit reporting agencies with the loan you are applying for. You can also consider saving money toward 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 two to four years after filing a Chapter 7 bankruptcy case and one to two years after filing a Chapter 13 bankruptcy case. The time variation will depend on whether you apply for an FHA or 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 put a portion of your income into a savings account every month. The ideal emergency savings account fund will cover all living expenses for three to six months for your household. You can start additional savings accounts for specific 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 an older item wears out and delay replacing personal property when you can. Make choices when it comes to buying essential items versus nonessential items. Consider using stores that sell used consumer goods for clothing and other personal property.
- Review your credit report every one to three 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.
- Pay your 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.