You have a fresh start, and some new challenges. Your credit rating, which probably wasn't all that great already, has taken a hit. The bankruptcy will stay on your credit report for up to 10 years. Lenders see you as a bad risk because you've legally written off at least some of your past debts. For a period of time you may not be able to get a loan or credit card. Once you do, the interest rates and fees attached will be punishing.
Remember: Nothing is forever. A bankruptcy legally can remain on your credit report for up to 10 years, but it's effect on your credit score can start to diminsh the day your case is closed. But only if you adopt responsible credit habits. Such as paying your bills on time, using only a small portion of your available credit and not applying for too much credit.
Bounce back fast and start over!
A friend of mine had trouble getting credit since his bankruptcy two years ago, but he knows that's not true for every filter. The fact that there are repeat bankrupts tells him that.When he was in bankruptcy court, there was a couple that they were filing bankruptcy for the third time. How could they get enough credit to get them into this much debt three times?
Actually, almost anyone can get credit soon after a bankruptcy. It's just a matter of knowing how. It's true that bankruptcy deals a devastating blow to your credit and your credit score, which lenders use to gauge your creditworthiness. But the effects don't have to be lasting. Long before the bankruptcy drops off your credit report, you could be qualifying for loans with good rates and terms.
Keep in mind, you need to get and use credit to build your credit score. Living on a cash-only basis may be a smart choice for those who really can't handle credit. But if you want to rebuild your credit score, you can't sit on the sidelines.
Life after bankruptcy
Take these steps as soon as possible after you file:
Order your credit reports from the three credit bureaus. Make sure the reports say your debts have been "discharged in bankruptcy"
Obtain an installment loan as a way of rebuilding credit, but prepare to pay a very high interest rate
If you have student loans, try to pay more than the minimum required each month
Don't co-sign for any loan
If you intend to keep your car, sign a reaffirmation agreement with your lender
Manage your finances wisely. Multiple bankruptcies are possible but are disastrous to your credit. You can file under Chapter 7 every eight years and Chapter 13 every two years
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Learn from your mistakes
Although repeat bankrupts show that getting credit after Chapter 7 or 13 filing is possible, you shouldn't want to emulate those who file more than once.At first glance, people who file more than one bankruptcy seem to be beating the system: They run up big bills and then walk away.
Think about a little more, though, and you'll see these multiple bankrupts are really defeating themselves. Their debts and credit history often mean they're paying out big bucks in high interest payments during the time when they're prohibited from filing another bankruptcy.
The 2005 bankruptcy law provides, that, under Chapter 7, eight years must elapse before you can refile. If you go for Chapter 13 after a Chapter 7, you must wait four years. Going from one Chapter 13 to another, two years must elapse.
And most people can't file for Chapter 7 liquidation if they have significant assets to protect, such as home equity or savings. So these folks who are repeatedly going broke often have little to show for all the money that's leaving their pockets. Instead of building wealth over time, they're losing ground.
Instead, use your bankruptcy as a wake-up call to figure out what's wrong with your finances and fix it.
Clean up your Credit Report
In order for his credit to recover, he needs to contact the credit bureaus and insist that those accounts be properly reported as "included in bankruptcy."
If you have other serious mistakes on your credit report, those need to be corrected as well. Your credit score is based on information in your credit report, so errors on your report can seriously dampen your score.
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Get a secured Credit Card
You need two types of credit to quickly rebuild your credit score:- Installment: auto loans, student loans or
mortgages
- Revolving: credit cards or home equity lines of
credit
Most recent bankrupts have trouble qualifying for a regular, unsecured credit card. So the best solution usually is a secured card, which generally gives you a credit limit that's equal to an amount you deposit at the issuing bank. Typically, that's $200 to $500, which may seem like a pittance compared with the credit limits you enjoyed before your bankruptcy. but don't make the mistake of using your available credit. Maxing out your cedit cards hurts your credit score.
You don't want to charge more than 30 % or so of your credit limit, and you want to pay the balance off in full each month. Light, regular use of a credit card is what helps build your credit.
And contrary to what you might have heard, you typically don't need to carry a balance or pay credit card interest to build your score, since the leading credit scoring formula doesn't distinguish between balances that are paid off and balances that are carried month to month. Get in the habit now of not charging more than you can pay off every month; your credit score and your finances will be the better for it. You also shouldn't just grab any secured card. Look for the following:
NO APPLICATION FEE AND REASONABLE ANNUAL FEE
Some secured cards tack huge upfront and annual charges onto their accounts; you don't need to pay these to build your credit.
REPORTS TO THE MAJOR CREDIT BUREAUS
You're not doing your credit score any good unless your payment history is being reported to the three major bureaus: Equifax, Experian and TransUnion. Call and ask if the card issuer regularly reports to all three before you apply.
CONVERTS TO AN UNSECURED CARD AFTER 12-18 MONTHS OF ON-TIME PAYMENTS
Good behavior should get you upgraded to a regular credit card within a year or two.
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Get an Installment Loan
If you still have student loans (which typically aren't dischargeable in bankruptcy), you can use them to rebuild your score. Make your payments on time, all the time, and try to pay more than you owe whenever possible. Next to making on-time payments, paying down your existing debt is one of the best ways to improve your credit score.Another option: a mortgage. Interestingly, it can sometimes be easier to get a mortgage after a bankruptcy than to get other types of installment loans.
You may be able to qualify for a high-rate loan as little as six months after a bankruptcy, but you're probably better off waiting until you can qualify for an FHA loan. You can typically get one just two years after your bankruptcy has closed, as long as you've maintained good credit habits since then. FHA loans have interest rates that are usually only half a percentage point higher than regular mortgage rates.
Just make sure you really can afford a home before you buy one. Many people wind up in bankruptcy court because they stretched too far to buy a house and can't keep up with all the attendant costs of homeownership, said bankruptcy expert Elizabeth Warren of Harvard Univerity.
Auto loans can also help rebuild your credit - just be prepared to pay nose-bleeding rates at first. If you go this route, try to make a big down payment and choose a loan that doesn't have a prepayment penalty. That way, you can refinance the car to a lower interest rate as your credit improves.
Just don't forget: The key is to make sure all your payments are made on time, all the time!
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