As consumer bankruptcy attorneys, we are regularly asked by our clients how they can begin to rebuild their credit after completing their bankruptcy case. Clients are often under the misunderstanding that their credit is shot for ten years. First let’s clear up that misconception.
Where Does This Misunderstanding Come From?
A Chapter 7 bankruptcy can remain on your credit report under the public record section of the report for up to 10 years from the date the case is filed. A Chapter 13 bankruptcy can remain on your credit report for 7 years from the date the case is filed. The misconception that bankruptcy ruins your credit for that length of time is not true. While the public record section of your credit report may contain the filing information for this length of time, this does not mean it will affect your creditworthiness for that length of time.
Your Credit Rating Can Improve
In a Chapter 7 case most filers will find their credit rating improves significantly within 2 to 3 years; sometimes sooner if a secured debt is reaffirmed in the Chapter 7 and the creditor continues to report that debt positively on the credit report. In a Chapter 13 a debtor is not allowed to take on any new debt until the case is discharged. So if it is a 5 year Chapter 13 plan, the bankruptcy itself will only be reported 2 more years on the credit report.
Effectively, there will be lenders willing to lend you money as soon as you have completed a bankruptcy. The key is how much will the lending cost, ie what interest rate will be payable on the loan? Right out of bankruptcy you can expect high interest rates so if you need to borrow again soon after the bankruptcy, perhaps you consider a less expensive car, for example, because you know the credit is going to cost you more. Within 2 to 3 years after filing the bankruptcy you will generally find that the interest rates available to you will stabilize and your credit score will have improved.
What Can I Do to Help My Credit Score After Bankruptcy?
I hear this question almost every day from folks coming in to see me about filing for bankruptcy. And the answer is there are several tips you can consider to begin rebuilding your credit score. Let’s talk about a few:
TIP # 1 – A Secured Credit Card
now to most debtors filing bankruptcy the thought of getting another credit card after completing a bankruptcy sounds scary. But a secured credit card will allow you to have the convenience of a revolving account without the worry of going in to default if you find you cannot make the payment. It can also help you improve your credit score. With a secured credit card, you would save up a sum of money, pay it to the secured card issuer as a deposit and this amount becomes your credit line on the card. If you find you cannot pay the credit card, the card issuer simply takes the money from your deposit. The line of credit will usually be small, say $500.00, but it gives you an available credit card to use in case of emergency. You also want to be sure to go with a lender that will report to the credit bureaus, i.e. Equifax, Transunion and Experian. As you pay the credit card each month with timely payments, this will be reported “pays as agreed” on your credit report and will help build your score.
TIP #2 – Pay More Than the Minimum Payment
If you do obtain a revolving credit account after bankruptcy, always try to pay more than the minimum payment listed in the billing statement. This too will help improve your credit. Combining this step with paying the revolving line down to zero before placing additional charges on the card again, will also help improve your score.
TIP #3 – Check Your Credit Report at Least Once a Year for Mistakes
You are entitled to receive a free credit report once a year as provided by the Fair Credit Reporting Act. You can send off for these free reports in writing each year, which is what I recommend, or you can download the reports online (however downloading online will subject you to arbitration in the event of a dispute).
When you complete a bankruptcy it is especially important to check your credit report within 3 to 6 months after you receive your discharge. You want to make sure each account that was discharged in your bankruptcy says “Discharged in Chapter 7” or “Chapter 13 Wage Earner Plan.” Anything else may be incorrect reporting and may affect your credit score.
There should be no outstanding balance reflected and no indication the account is in collections. If the account does reflect this incorrect information, you are entitled to have it corrected. Correcting your credit report can also improve your credit score.
As you can see not only does bankruptcy not completely ruin your credit for a long period of time, it can actually help to improve it within 2 to 3 years. If you would like the assistance of an attorney to help you navigate this terrain, please contact one of our Bond & Botes locations nearest you in Alabama, Mississippi or Tennessee for a free, confidential consultation.