Like many Americans, Bob and Jean purchased a home when times were good. Then the recession hit. Jean lost her job after ten years, along with their family medical benefits. Bob had to take about a 10% cut in pay when his overtime and bonus program were discontinued at his job. After a full year, Jean still was not working, their savings account was just about empty and they had no medical insurance. After trying every option, including a home-loan modification that never materialized, their credit score dropped to 562 and their cars and home were about to be lost. They filed for bankruptcy.
This story is becoming all too common. As a rule of thumb, bankruptcy is the least desirable option available to you when your finances have gotten out of control. However, if your financial situation has been going downhill for an extended period of time, your credit standing is probably so bad that filing for bankruptcy really won’t make it much worse, with one exception: a bankruptcy remains on your credit report for ten long years. With this in mind, creditors will know that once you file bankruptcy, you cannot do so again for seven years.
A Chapter 13 bankruptcy filing, sometimes referred to, as “reorganization” does not discharge your obligations. What it does do is allow you to work out a plan for paying debts off in amounts and timeframes that you can manage. Although a Chapter 13 bankruptcy will have a negative effect on your credit report, some creditors will view this as a demonstration of your willingness to pay your debts rather than to discharge them. In some cases, this may help you obtain new credit within a year or so.
From a credit standpoint, Chapter 7 bankruptcy is the darkest mark you can have on you credit report. While it absolves you of the debts you owe (except for monies owned in child support and alimony or unpaid income taxes), it makes obtaining new loans or credit cards extremely unlikely for at least a year or two and perhaps longer.
One common problem people emerging from bankruptcy often face is the catastrophic, long-term impact it has on the ability to be approved for new credit at a reasonable cost. Many creditors will not lend to you for one to two years. When you finally begin to qualify again, you will typically be categorized as “extra high risk”, which often is accompanied by low credit limits and very high interest rates. The news is that nothing in credit is forever. The effect of a bankruptcy on your credit score can start to diminish the day your case is closed.
TIPS FOR AFTER A BANKRUPTCY
1) Plan your credit recovery - take it slow and easy - do it right – don’t exceed what you can afford.
2) If your problem was related to medical bills, seek out a solution for insurance.
3) If your credit report contains inaccuracies about debt that was discharged through your bankruptcy, contact the creditor or the credit bureaus to request a correction.
4) Learn about how credit works through the Internet or counseling services.
5) If your problem is over-spending, create a written budget and STICK to it.
6) If you didn’t have enough saving to survive a setback, get serious about savings for an emergency fund. In the current economy, you need at least 12–16 months.
7) To re-establish a strong credit profile, you need a good history of payments from credit cards and installment debt, such as auto, student loans or a home loan.
8) When you start to re-establish your credit, consider a “secure” credit card. These cards are usually backed by your savings account or money you place in escrow to cover 100% of your credit line in case you don’t make your payment.
9) The rebuilding process requires you to use credit responsibly. Use only a small portion (30% or less) of your available credit line and ensure you make a payment every month.
10) You may be able to apply for a home loan in as little as two years after the discharge of your bankruptcy, however, expect to pay higher fees and interest rates.