One question I hear frequently as a consumer bankruptcy attorney is “Will I ever be able to buy a home (or car) again after I file for bankruptcy?” or “Will I be able to get credit again with a bankruptcy on my credit report?” The short answer is yes. You will be able to purchase a home or car after bankruptcy and you will be able to get credit again, if you follow some advice and make changes to your financial approach.
The vast majority of people who file for bankruptcy already have terrible credit, that’s no surprise. By the time most people consider bankruptcy they have exhausted all other options, have fallen far behind on payments for their credit cards, home and auto loans and many are also under pressure from court judgments or wage garnishment actions. For this group of filers, bankruptcy actually provides a small credit boost. That’s right, your score usually goes up after bankruptcy if you are in the group of filers who have a low credit score before filing. This can be true even if you are making your monthly payments.
This is because the credit reporting bureaus re-classify bankruptcy filers in their own category, and as a group that category is actually less risky to lend to, because the law prohibits you from re-filing for bankruptcy for a period of 4-8 years. As a result, lenders are more willing to extend credit to those who have just filed for bankruptcy and gotten rid of their unsecured debt (such as credit card and medical bills).
The trick is in how to take advantage of the availability of credit after bankruptcy without getting yourself back into the same situation that got you there.
Use It or Lose It!:
You will come out of bankruptcy without unsecured credit, that’s a given. Access to large amounts of revolving credit with high interest rates is what gets many people who file for bankruptcy into trouble in the first place. It is therefore only natural to be wary of taking out more revolving debt (which is where the full balance does not have to be paid off every month, in lieu of minimum payments—the catch is that the finance charges and interest continue to rack up as long as the original debt remains unpaid).
However, credit scores are based on your track record with debt and how consistently and responsibly you pay that debt. This means that living entirely on cash is not an option for those who wish to rebuild their credit score in hopes of buying a home or car or other property. In order to qualify for decent interest rates on those items, you need a decent credit score. Which means you need to responsibly use credit.
Credit Card Options:
Many people will qualify for an unsecured credit card immediately following bankruptcy. (Again, this I because the banks see you as less of a risk because you can’t file for bankruptcy again for a while.) Many people get offers in the mail right away. For those who do not receive these offers, a secured credit card is a good idea. Secured credit cards have low purchase limits and are secured by cash that you give to the card issuer.
In either case, secured or unsecured, it is most important that you stay well under your credit limit and that you pay your bill in full, on time, every month. A good guideline is to put no more than 30% of the total credit limit on the card every month. It may seem like a ridiculously small amount, but this is how you rebuild your credit after bankruptcy, by staying well under your credit limit and by paying (preferably in full) every month before the due date.
Also, do your research before taking out a secured credit card, they are not all created equal. You want to look for three things: 1) No application fee or high annual fee—this is just money in the lender’s pocket, it doesn’t help your credit score; 2) Make sure the card lender regularly reports to all three credit bureaus–Equifax, Experian and TransUnion—without this reporting the card isn’t doing anything for your credit history; and 3) the card converts to an unsecured credit card within 18-24 months—this should be the reward for paying on time and using the card wisely.
The other type of credit key to rebuilding your score after bankruptcy is installment credit, such as student loans, auto loans or home mortgages. Many people come out of bankruptcy with at least one of these types of loans still in their life. So use it to your advantage!
Regular, on-time payments on installment loans can help rebuild your credit score quickly. So if you came out of bankruptcy with an auto loan, make sure to make prompt payment a priority. If you still have student loan debt, make it work for you by using it to build a good payment history. If possible, you can even pay a student loan off early by sending in extra each month.
18-24 Months – The Magic Numbers
So, how long will it be before you can get back into the real estate market, or buy a new car (hopefully just new to you—if bankruptcy doesn’t teach people that buying an expensive new car with a huge monthly payment is a mistake, I don’t know what will)? The magic number seems to be 18-24 months. Yep, that’s it. For some it could be shorter, but research has shown that most people who use the years following bankruptcy to engage in sound, responsible financial practices can expect to get loans rates as good as those who did not file within 18-24 months.
Stay On Top of Your Credit Report:
A bankruptcy stays on your credit report for 10 years, but based on the above information, the negative impact lasts for a much shorter period of time. One reason for this is sheer numbers. Bankruptcy filings are reaching all-time high levels, over 135,913 consumer bankruptcy filings in October 2009 alone. That means that having a bankruptcy on your record is becoming a common occurrence, and luckily the stigma associated with bankruptcy is lessening as a result.
Debts discharged in your bankruptcy case should be reported on your credit report as “discharged in bankruptcy” and reflect a balance of Zero. However, don’t rely on that, make sure to keep tabs on your credit report and dispute any inaccurate information.
Overall, a bankruptcy filing is not the end of the world as far as your future ability to obtain credit. For many, your credit can improve immediately following bankruptcy. Regardless of the immediate impact for your situation, your credit history will steadily improve following a bankruptcy so long as you stay within your means and ability to repay.