Credit Repair After Bankruptcy
A common misconception about bankruptcy is that it ruins your credit. While bankruptcy does push your credit score down in the short term, recovery begins right away. Most people recover about 100 points on their credit score in the six months post-bankruptcy. You’ll get multiple credit card, unsecured loan, and auto financing offers in the days and weeks after a bankruptcy, and you can get a home loan in as soon as two years after a Chapter 7 under FHA and VA programs.
Why? Several reasons:
- Because the bankruptcy resets your debt-to-income ratio. After a bankruptcy, most or all of your debt is gone, so you are in a better position to pay new debts that you might incur. This is why many landlords will insist that people with bad credit come back after bankruptcy. You’re much more likely to be able to consistently pay rent if you’re not at risk of getting sued over a credit card debt.
- Missed payments continually suppress your credit score until the debt is resolved. Bankruptcy hits your credit once, wiping out the debt and allowing you to recover. Creditors can’t report new negative data to the credit bureaus after a bankruptcy, and many will delete their entries completely. Delaying a bankruptcy is delaying your credit recovery.
- Creditors know that you can’t file a new Chapter 7 bankruptcy for 8 years after a previous 7, so you’re a safe bet.
- If creditors stopped working with anyone who filed for bankruptcy, their pool of available clients would shrink dramatically. Credit card companies don’t take it personally when you file bankruptcy, it’s just a cost of doing business. They just close your account, take a tax deduction, and send you a new application.
For many people, the quickest way to rebuild credit damaged by outstanding debt, missed payments, and collections is to simply wipe the slate clean with bankruptcy.
What is a Credit Score?
A credit score is a number between 300 and 850 that lenders and other third parties use to determine the risk of giving you money. Banks, credit card companies, and other financial organizations use the score to determine if you can or will be able to pay off any obligations you accrue.
A better credit score demonstrates your desire and capacity to repay any loans you may be accepted for based on your current financial situation and previous conduct.
A bankruptcy will generally push you into the 500 – 550 range depending on what your score was when the case was filed. That’s just temporary, though, as your score will recover quickly.
What is a Good Credit Score?
A good credit score is defined as a number between 670 and 850. Lenders may refer to your credit in terms of credit level or credit quality — such as low, fair or average, good, or exceptional — with each category relating to a different range of FICO Scores.
What is a Credit Report?
A credit report is a document that contains details about your credit history and current financial position, such as loan repayment history and credit account status.
The majority of individuals have several credit reports. Credit reporting organizations, also known as credit bureaus or consumer reporting agencies, gather and maintain financial information about you that creditors, such as lenders, credit card companies, and other financial institutions, send to them. Creditors aren’t obligated to report to all credit reporting agencies.
Lenders utilize these reports to determine whether or not they will lend you money and, if so, at what interest rates. Lenders also use your credit report to see if you are still meeting the requirements of an existing credit account.
How Long Does it Take to Rebuild Credit After Chapter 7 Bankruptcy?
A Chapter 7 bankruptcy appears in the public records section of your credit report for 10 years. However, this is simply informational. Your credit score begins rising very quickly after bankruptcy and it doesn’t take long for your score to be higher than it was prior to filing.
Additionally, when you file bankruptcy creditors are prohibited from reporting negative information about debts included in the bankruptcy. The fresh start provided by a bankruptcy is the springboard for repairing your credit.
How Long Does it Take to Rebuild Credit After Chapter 13 Bankruptcy?
Unlike a Chapter 7 bankruptcy, a Chapter 13 bankruptcy only appears on your credit report for 7 years. Like in a Chapter 7 your debts will begin dropping off your credit report right away, clearing the way for your credit score to grow. You can speed up the process by following these suggestions.
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What Are the Different Ways to Rebuild Your Credit After Bankruptcy?
Your credit score will grow after bankruptcy without any significant effort on your part. However, if follow the instructions below your credit score will ultimately improve more quickly and you’ll be eligible for better credit offers with lower interest rates and fewer fees.
Check Your Credit Report for Errors
After filing for bankruptcy, the first step in improving your credit score is to review your credit report for any irregularities. While having a bankruptcy on your credit report would undoubtedly negatively influence your score, the damage will be amplified if there are any other inaccuracies.
For example, if your debt is still shown as ongoing rather than erased following bankruptcy, it will even hurt your credit score. With that in mind, it’s a good idea to review your credit report thoroughly. Each year, you are usually entitled to one free report from each credit agency.
When you have your credit reports on hand, go over them thoroughly and look for errors. You may always submit a credit dispute letter and ask the credit bureaus to erase any incorrect information from your report if you find any.
Apply for New Credit
Obtaining new credit after bankruptcy will speed up the improvement to your credit score, as long as you do so carefully. It allows you to demonstrate to lenders that you can make timely payments and are responsible for your accounts.
The catch is that you should limit how frequently you seek new credit. When a lender files an application, it makes a hard draw on your credit report, lowering your score further.
As a result, you should thoroughly examine your credit alternatives and apply for only one account at a time. For this, you have two feasible solutions:
Opt for a Secured Card. Secured cards are not the same as regular credit cards. You must first deposit money with a bank or credit union to get one of these cards. Your credit limit is then determined by the amount you put down. This strategy provides lender certainty because they may keep your deposit as payment if you can’t make your payments on the card.
Secured cards are frequently more straightforward to get accepted for than standard credit cards because of the way credit limits work. Secured cards are commonly used as a stepping stone to traditional credit by people who have filed for bankruptcy. Your credit score should increase over time if you receive a secured card and utilize it carefully.
Get a Credit-Builder Loan. Credit-builder loans are relatively similar to secured credit cards in terms of how they function. Your deposit will serve as your loan balance in this scenario. You’ll be allowed to use the money, but you won’t be able to get it back until you’ve paid off the loan completely. As you make payments over time, the information will be reported to the credit agencies, which will aid in the restoration of your credit score.
Smaller lenders and credit unions are typically the ones that would give this sort of loan. While practically every lender understands what a “credit-builder loan” is, these loans are also known as “starting over loans” or “fresh start loans.”
While it’s easy to slip into debt by opening too many lines of credit, having one or two credit cards will help rebuild your credit score.
Practice Good Credit Habits
Following your approval for a new account, the following step is to ensure that you maintain solid credit practices. With that in mind, use the advice below to begin rebuilding your credit after bankruptcy.
Make Your Payments on Time. Making on-time payments is the most efficient way to increase your credit score. Payment history is the most heavily weighted component of your credit score Additionally, aside from completing your payments on time, you should be sure to pay as much as possible over the minimum amount.
Keep Your Balances Low. Maintaining a low balance is also a good idea. Credit usage is how much credit you’re using compared to how much credit you have available. Credit usage accounts for a portion of your FICO score.
Get in Touch With Us Today
Schedule a free consultation with The Law Office of Clark Daniel Dray and we’ll assist you in selecting the best option for resolving your financial troubles so that you can begin rebuilding your credit ASAP.