Life After Bankruptcy: Rebuilding Your Credit
Many people think that the bankruptcy process should be avoided at all costs because it will essentially eliminate their ability to obtain credit in the future. This is at best a half-truth. When debtors receive a bankruptcy discharge, their credit report will designate unsecured obligations like credit cards, unpaid medical bills, cell phone bills and similar ordinary unsecured obligations as “discharged in bankruptcy”. While an individual’s credit score will take a significant hit when a bankruptcy is filed, the long-term impact of bankruptcy can include more available credit, homeownership and reclaimed financial security.
Initial Re-Establishment of Credit
Although a Chapter 7 bankruptcy will preclude credit opportunities in the short-term, debtors tend to receive credit offers within a reasonably short period after receiving a bankruptcy discharge. The initial offers that are typically received via mail solicitations generally will not be genuine credit offers. There are many financial institutions that now offer so-called “secured credit cards” or “pre-paid credit cards”. While the details of these offers vary significantly, the debtor usually provides a cash deposit or links the card to his or her bank account.
In other words, these card do not really reflect an actual extension of credit. However, many of the entities that offer these cards will report monthly payments so they allow debtors to establish a history of timely payments on their credit report. These “non-credit” credit cards are often accompanied by high fees and hidden costs, so you should carefully investigate such offers before making a selection. Since the primary reason to use these cards is to build positive credit history, you should also confirm that the entity will be reporting your payments to the credit bureaus.
If you consistently make timely payments on these types of pre-paid cards, you will start to receive offers for unsecured credit offers though they might be at less than ideal interest rates. The key is not to get overextended because on time payments will result in offers of credit with better terms. By contrast, post-discharge late payments can seriously undermine your progress in rebuilding your credit, so it is important to establish a budget and try to adhere to it as much as possible.
Bankruptcy Can Make You a Better Credit Risk
Despite the short-term impact of a Chapter 7 bankruptcy filing, a discharge will have a number of positive consequences that can make you more attractive to creditors. Since most Chapter 7 bankruptcies involve a discharge of tens of thousands of dollars of unsecured obligations, your debt to income ratio might improve dramatically. Presumably, you will have more disposable income that can be used to make payments on credit cards.
Deadlines that apply to multiple bankruptcy filings also provide a motivation for financial institutions to offer credit after a Chapter 7. Debtors can only obtain a Chapter 7 discharge once every eight years, so the fact you have a bankruptcy discharge on your credit report lets creditors know that you cannot obtain relief from the obligation to pay the debt by re-filing for Chapter 7 during the interim period.
If you have been diligent in making timely payments after your bankruptcy, your inability to seek a Chapter 7 discharge and limited amount of unsecured debt can actually make you a more attractive credit customer. Credit agencies generally look beyond the credit score, so potential creditors do note these types of details.
Many debtors are even successful in purchasing a home within a reasonable time after filing for bankruptcy. Debtors typically must wait two years after a Chapter 7 discharge to apply for an FHA mortgage or four year for a conventional loan. The wait before you are eligible for an FHA loan is only one year after a Chapter 13 discharge and only two years after such a discharge for a conventional loan.
If you have question about Chapter 7 or Chapter 13 bankruptcy, our experienced Maryland bankruptcy attorneys at Georgette Miller and Associates P.C. can evaluate your situation and formulate the best option to fit your situation. Please feel free to contact us today at 866-964-6529 to learn how we can help.