Rebuilding Credit after Bankruptcy
UPDATED: January 30, 2020
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Bankruptcy is a form of debtor’s protection that affords an individual or company huge relief from collection calls, wage garnishments, bank levies, and property liens. Once a bankruptcy petition is filed, creditors are required to cease calling, writing, and attempting to collect from a debtor. A bankruptcy discharge makes the temporary reprieve permanent.
The Two Types of Consumer Bankruptcy Protections
Chapter 7 permits a debtor to eliminate unsecured debts. These include credit card debt, store charge cards, and unsecured credit lines. To quality for Chapter 7 bankruptcy, an individual must have a certain debt to income ratio.
Chapter 13 involves a debtor agreeing to a repayment plan over a period of years. Chapter 13 is typically used by debtors that have a home they wish to keep through the bankruptcy process.
Improve Your Credit Score as Soon as Six Month after a Filing
A debtor can start improving their credit score within six months to a year after a bankruptcy discharge is complete (particularly after a Chapter 7 filing). This is because today, lenders look more at credit score than at specific comments on a credit report. In the past, most lenders had their own scoring system and individual reporting held more weight. They looked very closely at every derogatory remark on a credit report.
Review Your Credit Score after a Completed Filing
After a bankruptcy filing is complete, it's a good idea to closely review credit reports and verify that they are accurate and up to date. Most creditors have no incentive to report that a debt was discharged in bankruptcy. To appear solvent, a debtor should contact the credit bureaus so that discharged debts do not show up as current debts. This will keep the old obligations from being part of the debt when creditors calculate the debtor's income.
Contacting the credit bureaus and letting them know that a bankruptcy discharge has completed will also prevent them from thinking that the filing is still underway and that there are still outstanding debts. When rebuilding credit after a bankruptcy, it's important to be vigilant about reading credit reports and correcting errors. If there are any erros, typically, the dispute process is easy. One option is to send a simple letter to the credit bureau, or dispute items directly with the credit bureau online. Items on a credit report that are marked “included in bankruptcy” disappear within seven years. The entire bankruptcy disappears in 7-10 years.
Secured Credit Cards to Rebuild Credit
A person who wants to rebuild their credit after a bankruptcy can also obtain a secured credit card. This type of credit card usually requires collateral, such as a cash deposit or savings account. After the card holder makes payments in a timely fashion for a set period of time, the credit card company will typically drop its requirement for collateral. The card will then become an unsecured credit card. Banks that issue credit cards are aware that they are often taken for the purpose of rebuilding credit. These banks report credit balances and payments to credit bureaus partly in an effort to assist people who are trying to rebuild their credit.
Post-bankruptcy FHA Home Loans
A person who has obtained a bankruptcy discharge through a Chapter 7 or Chapter 13 filing is also eligible to apply for a FHA loan to buy a home. They can do this as early as two years after receiving a bankruptcy filing. In considering a loan application, the FHA will look at whether the debtor has re-established credit, avoided incurring substantial new debt, and otherwise demonstrated effective handling of their finances. A qualified bankruptcy attorney can help debtors file for bankruptcy and advise them on how to rebuild credit and financial security.