Rebuilding Credit After Bankruptcy
HOW BAD IS BANKRUPTCY ON MY CREDIT SCORE?
This is one of the most common questions we receive. The impact that a bankruptcy will have on your credit score is relative to what your credit score is before you file. Although everyone’s credit history and credit score is different, we typically see our clients’ credit scores drop (or rise) into the low 500’s immediately after filing. It doesn’t move much until the bankruptcy discharge is entered and reflected on the credit report. A person’s credit can then begin to recover almost immediately after discharge.
WHAT ARE SOME OF THE PRACTICAL IMPACTS OF BANKRUPTCY?
As for the practical impacts that a bankruptcy will have on your life, you will likely find that you may need a larger down payment on a secured debt (such as a car loan) and you will likely pay a higher interest rate on loans you incur shortly after bankruptcy. The longer you wait after bankruptcy, and the higher your credit score rises, the better terms you will get on loans. Under FHA guidelines, you can (with satisfactory credit since bankruptcy) qualify for a mortgage 2 years after a Chapter 7 has been discharged, or after 1 year of on-time Chapter 13 payments under the terms of a confirmed Chapter 13 plan. Some clients have reported that their car or homeowner’s insurance premiums increase after they file bankruptcy.
HOW LONG DOES BANKRUPTCY STAY ON MY CREDIT REPORT?
A Chapter 7 will stay on a person’s credit report for 10 years after the case is filed. A Chapter 13 will stay on a person’s credit report for 7 years after the case is filed.
CAN I EVER RENT AGAIN AFTER I FILE BANKRUPTCY?
Yes! Each landlord or rental management company has different standards for who they rent to and under what circumstances, so it is ultimately up to each landlord whether they will rent to a person who has filed bankruptcy. However, in our clients’ experience, it is generally easier to rent after a bankruptcy has wiped out their debts than it is when they have debt and creditors actively pursuing them. One thing bankruptcy doesn’t necessarily help with is a person’s rental history –evictions, unlawful detainers, etc. stay on a person’s rental history whether they file bankruptcy or not.
HOW DO I REBUILD MY CREDIT AFTER BANKRUPTCY?
The best way to rebuild credit after bankruptcy is to show that you can use credit responsibly. This means making all payments on time, not seeking to incur or charging debt that is unreasonably large in comparison to your income, and managing your finances appropriately. The best ways to do this are to work with your bank or credit union to rebuild your credit through either a secured credit card or “credit builder” loan. A secured credit card is a credit card where you pay a deposit to the issuer in the amount of your credit limit. You can then charge and pay off the credit card monthly up to the credit limit (which then shows up on your credit report as timely payments). Some banks and credit unions offer a “credit builder” loan in which they issue a secured loan to the borrower, which the borrower must use to purchase a Certificate of Deposit held by the lender. The loan is secured by the Certificate of Deposit, and the borrower pays the loan off in monthly installments. Each monthly on-time payment shows up on the borrower’s credit report. At the end of the loan, the borrower has a Certificate of Deposit saved up.
WHAT ARE SOME IMPORTANT THINGS TO DO AFTER FILING BANKRUPTCY?
First, follow through with any requests by your attorney and the Trustee. A bankruptcy isn’t truly effective until the debts are discharged, and there may be things your attorney needs before your debts can be discharged. There may also be things your attorney needs you to do after discharge to complete the administration of your case.
Second, if you get any letters, phone calls, or bills from any of the debts in your bankruptcy, let your attorney know.
Third, a month or two after your debts are discharged, pull your credit report to verify that the discharged debts are actually shown as discharged. You have the right to obtain a credit report from each of the 3 major credit reporting agencies once every 12 months from here. While this website will not show you your credit score, it will show each debt and how it is being reported.
Fourth, consider taking active steps to rebuild your credit, such as obtaining a secured credit card or a credit builder loan from a bank or credit union.