Thursday, June 16, 2022
HomeEditor PicksDoes Bankruptcy Improve Your Credit Score

Does Bankruptcy Improve Your Credit Score

Become An Authorized User On A Credit Card

How bankruptcy can improve your credit score | Hoyes Michalos

If you dont want to take out a secured credit card, you can ask a family member or friend who has good credit to add you as an on one of their credit cards. You may see an increase in your credit score if the issuer reports the cards positive payment history to the three main credit bureaus. However, your score could take a dip if the primary cardholder makes a late payment or maxes out their credit limit.

Employing Other Types Of Credit

Car dealerships may actively market to people who have recently emerged from bankruptcy. A few months after receiving their bankruptcy discharge, consumers may start receiving letters from dealerships offering to help them re-establish credit through the purchase of a new car . The terms on these types of loans may fall in line with the terms offered in other parts of the subprime marketthey aren’t good, but they are not horrible, either. Since you recently filed for bankruptcy, you’re considered a risky borrower.

Whereas folks with a decent credit score might get loans at a rate of 5%, these loans could come with rates as high as 18% or more. If you can afford to stick to payments with such high rates, you could use these loans as a way of building credit.

However, this strategy is generally not advisable unless you have the cash or income to support such a high-interest payment. A good rule of thumb for interest payments is that you should try to avoid any interest rate that is higher than the rate you could reasonably expect to earn by investing your money in the stock market .

Cease Reporting Of Delinquencies

Most of the time, those who are considering the option of bankruptcy are doing so because they are substantially behind on their bills and cannot realistically pay them. When people are consistently paying bills late, or stop paying them completely, creditors will start reporting them as delinquent to the reporting agencies.

These delinquencies reflect poorly on your credit score and will remain a part of your credit history for years to come. The longer debts are left unpaid, the more delinquency strikes against your credit you will receive, and the only way to remove them is to ensure no delinquencies are reported for an extended period of time. Filing for bankruptcy ceases reporting of delinquencies, and the sooner this happens, the sooner you can begin the countdown to when your pre-bankruptcy strikes will disappear from your credit history.

Read Also: Dave Ramsey How Much To Spend On Engagement Ring

Bankruptcy & Your Credit Score

Unlike what you may have heard – filing bankruptcy does not ruin your credit forever! Itâs one of the biggest myths about bankruptcy.

In reality, many people see their credit score go up almost immediately after filing bankruptcy. If you need debt relief but are worried about how bankruptcy affects your credit rating, this article is for you. Letâs start at the very beginning…

Beware Predatory Lenders Following Bankruptcy

Can Filing for Bankruptcy Improve Your Credit Score?

Some people are concerned theyll never be able to get approved for credit after they file for bankruptcy. Nothing could be further from the truth.

Many people even find they receive numerous offers after their debts are discharged. There are a few reasons for this.

First, creditors know youll likely feel desperate and be willing to accept terms on a credit card that would otherwise be unappealing. Second, they know that because you recently filed for bankruptcy it will be several years before you can file again. This means they arent at risk for the discharge of any debt you accumulate with them and theyll be able to sue you, successfully, if you let your payments lapse.

If youd like to know more about the rules regarding multiple bankruptcies, check out this information.

Be careful about accepting offers for credit following bankruptcy. Unscrupulous lenders will take advantage of your situation and if you dont understand your options, you might find yourself back in financial trouble after completing your bankruptcy.

If you have questions about how bankruptcy affects your credit score or you want to know more about how filing can improve your financial situation, we can help. Contact the Law Office of Robert M. Geller at 813.254.5696 to schedule a consultation to discuss your case.

Also Check: Filing Bankruptcy In Il

Rebuilding Your Credit Score

Your ability to borrow is dependent on more than just one item on your credit report. A past bankruptcy is one factor, but a potential lender will review other factors including your income, work history, living situation, and other credit you have re-established.

If you want to rebuild your credit rating after bankruptcy, it is recommended that you do the following:

Bankruptcy Affects High Credit Scores More Than Low Credit Scores

The higher your FICO score is before a bankruptcy filing, the more it will affect your credit rating:

Score
Note: Scores do not go lower than 300130-150 points

You will likely drop to a poor credit score no matter what score you started with. Your credit history already shows you filed for bankruptcy, but credit bureaus want to ensure you take steps to improve your bad credit before you take on more debt and new credit.

The sliding scale system will generally knock your credit points however much it takes to show you have poor credit. Your score may barely change if you already have bad credit . It is not common to see credit scores lower than 500 even after a bankruptcy filing.

Don’t Miss: Chapter 7 Bankruptcy Milwaukee

Can You Get A Credit Card After Filing For Bankruptcy

Yes, you can get a credit card after filing for bankruptcy. That said, a bankruptcy will make it very difficult for you to get a regular unsecured credit card, however, you can apply for an unsecured credit and build good credit history for that account. The only difference between a regular credit card and a secured credit card is that to get a secured credit, you need to pay a security deposit and the deposit that you pay will be your credit limit.

What Happens To Your Credit When You File For Bankruptcy

How to Improve Your Credit Score After Bankruptcy

How long your bankruptcy stays on your credit report depends on the type of bankruptcy you file. The two most common types of consumer bankruptcy are Chapter 7 and Chapter 13. In a Chapter 7 bankruptcy, you do not repay any of the debt owed. This type of bankruptcy listing remains on the credit report for 10 years from the date it is filed. Under Chapter 13 bankruptcy, you are responsible for paying back a portion of the debts that you owe through a debt repayment plan. A Chapter 13 bankruptcy is removed from your report seven years from the date it is filed.

Having a bankruptcy in your credit history will seriously affect your ability to obtain credit for as long as it remains on your report. If you do qualify for credit while the bankruptcy is part of your credit history, you will likely have to pay higher interest and fees than you would otherwise. It can also affect your ability to qualify for things like an apartment, utilities and even employment. Even insurance rates may be affected.

You May Like: Filing For Bankruptcy In Illinois

Can You Get Credit After Bankruptcy

Although it may be harder to find a lender willing to offer you a competitive product, there are still ways to get credit after bankruptcy. Some types of credit you could receive include:

  • Car financing. Chern says that its possible for a Chapter 7 debtor to finance a car the day after filing. Additionally, a Chapter 13 debtor may be able to finance a car while the repayment plan is still in effect, although the trustees permission is required after showing that the car is necessary to complete the debt repayment.
  • Conventional mortgage. Most experts say that it will take 18 to 24 months before a consumer with re-established good credit can secure a mortgage loan after personal bankruptcy discharge. Credit-impaired borrowers should prepare to pay interest rates that are 2 points to 3 points over conventional rates.
  • FHA-insured mortgage. Chapter 13 filers can get an FHA-insured mortgage if theyve made timely payments for one year and the debtor has received the courts permission. Debtors with a Chapter 7 bankruptcy discharge must wait at least two years after discharge and establish a history of good credit.

Rebuilding Your Finances After Bankruptcy

After bankruptcy, potential lenders would like to see that you have enough income to pay your current obligations, and have a little left over. A lighter debt burden makes you a more attractive borrower.

Heres how to stay on top of your debt:

Create a budget. The pre-discharge credit counseling you went through before finishing your bankruptcy should have provided information on budgeting, but if not, dont hesitate to seek help from a . All nonprofit credit counseling agencies offer free basic consumer help on topics such as budgeting.

Begin building an emergency fund. Research by the Urban Institute shows that having as little as $250 in savings for an unexpected expense can protect families from resorting to high-cost loans or running up credit cards, which can start a new debt spiral. Any money you tuck away in a fund now can help you tackle those unexpected expenses.

Practice good credit habits. Once you get a lender to extend credit, be vigilant about paying on time. Keep your credit card balances low relative to card limits less than 30% is typically advised, but less than 10% is even better.

About the author:Bev O’Shea writes about credit for NerdWallet. Her work has appeared in the New York Times, Washington Post, MarketWatch and elsewhere.Read more

You May Like: How Many Trump Bankruptcies

Build An Emergency Fund

Because much of your debt will likely be eliminated following a bankruptcy, its an ideal time to start building up your savings. By putting a portion of your income into a savings account or cutting back on nonessential subscription services or memberships, you avoid having to apply for loans which could put you back into debt if youre unable to keep up with the high interest rates that come along with bad credit.

Why this matters: Without an emergency reserve, it can be easy to fall into the same debt pitfalls that caused the bankruptcy.

How to get started: After your debt payments are removed as part of the bankruptcy process, make sure to create a budget based on your income and remaining expenses. Include building an emergency fund as part of your new budget.

Consider Applying For A Secured Credit Card

How to Increase Your Credit Score After Bankruptcy (Part 2)

After filing for bankruptcy, its unlikely that you will qualify for a traditional credit card. However, you may qualify for a secured credit card. A secured credit card is a credit card that requires a security depositthis deposit establishes your credit limit.

As you repay your balance, the credit card issuer usually reports your payments to the three credit bureaus. Repaying your balance on time can help you build credit. Once you cancel the card, a credit card provider typically issues you a refund for your deposit.

When shopping for secured credit cards, compare annual fees, minimum deposit amounts and interest rates to secure the best deal.

Read Also: Has Trump Ever Filed For Bankruptcy

Need Of A Loan Or Credit Card Immediately After Bankruptcy

Most mortgage companies provide FHA loans for the average credit score range. Traditional financing options require a score of about 600 or higher.

There are options for buying high-cost necessities after filing bankruptcy claims. Secured credit cards and loans exist for people who face bankruptcy.

You can opt for either credit builder loans or other financing options.

Monitor Your Credit Score

Bankruptcy will likely cause an initial drop in your score of 100 to 200 points or more, though this varies and the effects improve over time. Checking your credit score from month to month is a critical step in improving your score after bankruptcy. To do so, create an account with a free online service several credit card companies also offer customers free score updates.

Once your accounts are discharged during the bankruptcy process, check your score to confirm that these changes were accurately reported.

To avoid further decreases, monitor your credit score for any red flags that may signal identity theft or other issues. This may include fraudulent loan applications made in your name, inaccurate account statuses or civil suits or judgments you werent involved in. While score increases may come slowly, checking your credit score regularly is also an effective way to stay motivated as you take steps to improve your credit habits.

Recommended Reading: Can You Rent An Apartment After Filing For Bankruptcy

Check Your Credit Report To Ensure Your Bankruptcy Is Accurately Recorded

Bankruptcy seriously damages your credit report, but there can be errors that make it worse than it actually is. For example, debt shown as active or late instead of discharged might harm your credit report.

Be sure to review your after bankruptcy. If you spot an error, dispute it as soon as possible. Lexington Law can often help you to work to remove bankruptcy related items from your credit report.

Many consumers find unfair credit reporting and outright inaccuracies. Be aware that your old bankruptcy shouldnt linger on your report after seven years or 10 years have passed.

But Ive Never Missed A Payment I Just Have No Hope Of Ever Paying Off My Debt

How does bankruptcy effect your credit score?

If youâre one of the few that has been able to stay current with all debt payments, but need to reorganize your financial situation through a Chapter 13 bankruptcy, your credit score will go down initially.

But, thatâs not the end of the story. Once your bankruptcy discharge is granted, your debt amount will go down significantly! And guess what helps build and maintain good credit? A low debt-to-income ratio.

Debt-to-income ratio?!

Put differently, the best credit rating is possible only if your total unsecured debt is as low as possible. A bankruptcy discharge eliminates most, if not all of your debt. Itâs the one thing you can do that your current debt management methods canât accomplish.

Doesnât bankruptcy stay on your record for 10 years?

Well, yes, under federal law, the fact that you filed bankruptcy can stay on your credit report for up to 10 years. This is true for all types of bankruptcy. But, Chapter 13 bankruptcy stays on your credit report for only seven years from the filing date.

According to Experian, thatâs because unlike a Chapter 7 bankruptcy, Chapter 13 involves a repayment plan that pays off some amount of debt before a bankruptcy discharge is granted.

Read Also: How Many Bankruptcies Has Trump Filed

How Long Does Bankruptcy Stay On Your Credit Report

According to Equifax, Canadas largest credit reporting agency, a first time bankruptcy will appear on your credit report for six years after your date of discharge. This means if you are bankrupt for the minimum period of nine months, your bankruptcy will appear on your credit report for nine months plus six years, or almost seven years in total.

A second bankruptcy appears on your credit report for 14 years.

What Is A Bankruptcy Score

As our use of credit increases, lenders are looking for more tools to help them continue to lend more money, while reducing their overall risk. And it turns out that there is a significant difference in behavior between the person with bad credit who will not file bankruptcy, and the person with a similar bad credit score who will and this is what your bankruptcy score measures.

The person who is predicted to file bankruptcy is different than the typical bad credit borrower in that the potential bankrupt person:

  • Uses his credit more often
  • Applies for credit more often
  • Has less accounts in collection
  • Has a higher credit utilization rate
  • And has more new accounts.

In other words the potential bankrupt has a much more active credit history than someone who has a history of delinquency on their existing accounts. Because of that credit bureaus have built new credit risk models that rank credit utilization, recent delinquencies and recent inquiries much higher.

Equifax has been providing such a bankruptcy score to lenders for several years now. Called the Bankruptcy Navigator Index this model Predicts the likelihood of a consumer becoming bankrupt within the next 24 months. However this is just one such model and there are many out there. Unlike the traditional credit score, there is not necessarily a similarity between rankings and they are not something that the average consumer can easily understand, let alone access.

Recommended Reading: Who Is Epiq Corporate Restructuring Llc

Bankruptcy Score Vs Credit Score

Bankruptcy scores have a lot in common with credit scores. They both aim to evaluate borrowers risk. They both factor in information such as payment history, credit utilization, and new credit applications.

Bankruptcy scores and credit scores serve slightly different purposes, however. While credit scores indicated the general risk of a borrower, bankruptcy scores strictly indicate the likelihood of the borrower filing bankruptcy within a specified time frame- typically two or three years. Depending on the type and length of loan as well as the lenders objectives, the lender may place more emphasis on one score or the other.

Credit scores and bankruptcy scores are also figured in very different ways. Credit scores typically use the FICO method, or a method very similar. How FICO scores are figured is public knowledge, impacted by payment history, credit utilization, age of credit, credit mix and new credit, in that order. Because credit scores all use the same model, credit scores all fall within similar ranges of roughly 300 to 850.

RELATED ARTICLES

Popular Articles