Repairing Your Credit After Bankruptcy
If you want to buy a home or car, you need either a lot of cash or a large loan. Its been that way forever and things wont change just because you have filed for bankruptcy.
The problem is that after bankruptcy the sight of your credit report will repel lenders. If you want to get a mortgage after bankruptcy, you need to restore your credit score to a respectable value. A FICO score of 680 is considered good and would net you fair rates at most financial institutions.
Your recent actions have a bigger impact on your credit score than negative events in the past, so you want to make sure that you are feeding your credit report positive data in the years following bankruptcy to build up from a low score.
The best way to improve your credit score is to make on-time payments. Credit bureaus track the payments made to your open accounts, like loans or credit cards. However, you may not have any of these accounts open after bankruptcy.
This traps you in a ridiculous dilemma: you need an open account to improve your credit score, but you need an improved credit score to open an account. It will take some persistence, but there are ways to get around this pesky catch-22.
Here is a list of things you can do to improve your credit score after bankruptcy:
- Monitor credit report for accuracy
- Make on-time payments on debts not included in your bankruptcy
- Build credit with a secured or retail credit card
- Have someone cosign for a new credit card or loan
- Become an authorized account user
Review Breakdown: Credit Cards After Bankruptcy
If you’ve previously filed for bankruptcy and are seeking a new credit card, your options can be very limited. However, there are several major banks that issue credit cards for applicants who are post-bankruptcy. By keeping your balance below its limit and making your payments on time, you can earn positive marks on your credit history and start rebuilding your credit score, one month at a time.
Your Bankruptcy Has To Be Discharged Before You Can Apply
You cannot apply for any new lines of creditincluding a credit cardwhile your bankruptcy proceedings are in progress without court approval. The amount of time it takes to settle and complete your bankruptcy proceedings will determine when you can apply for a credit card.
A Chapter 7 bankruptcy takes approximately four to six months after the initial filing to be completed and your debts discharged. After that, you can apply for a credit card.
A Chapter 13 bankruptcy, however, can take between three to five years as its a restructuring of your debt that you pay off over time. Only after youve made your last payment will your bankruptcy be discharged. Until then, youll have to wait that entire period of time before applying for a credit card.
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New Budget New Credit Score
Perhaps the most challenging yet crucial part of post-bankruptcy is building your credit. Getting a credit-builder loan or a secured credit card can pave your way into improving your credit score and can get you an unsecured card.
These are low-risk and amongst the fastest methods to rebuild your credit after bankruptcy. In addition, these types of loans are usually of smaller amounts.
This amount can be deposited into your account. While the lender keeps the money, you can make payments off of your interest. When the loan is paid, the money is released to you.
In contrast, a secured credit card requires a deposit which usually equates to your credit limit. Given you make punctual payments, the deposit is later returned to you.
If you do not make timely payments, the card issuer will use your deposit to recover these payments.
You get your money back through these methods. Moreover, these payments are reported to the credit bureau, and you can have positive marks on your credit report.
Win-win for you and the lender!
However, these types of loans and cards come with higher interest rates and restrictions.
If you do not make hefty payments and pay your balance on time, your credit score will improve significantly.
Slowly but surely, you will get a regular unsecured card when you do, make sure you keep the balance low and pay it off on time, monthly.
Should I Get A Secured Credit Card After Bankruptcy
Oct 7, 2021Bankruptcy
After a bankruptcy, its not only a good idea to get a credit card to start rebuilding your credit, its absolutely necessary. Unless you start rebuilding your credit, it will be difficult, if not costly, to obtain auto loans, rent an apartment or house, or eventually get a mortgage.
When you first obtain a bankruptcy discharge, your credit score is going to take a hit, however, if youre like most bankruptcy filers, your credit was not that good when you filed for bankruptcy. If you had any late payments and collections before the bankruptcy, your FICO score was already suffering.
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Assess The Type Of Your Bankruptcy
If you file for bankruptcy, the most common being Chapter 7 bankruptcy and Chapter 13 bankruptcy, your credit is in dooms, and the only way to salvage it, is constantly being consistent.
On the brighter side, filing for Chapter 7 bankruptcy means that you will not be eligible for Chapter 7 for another eight years.
However, the immediate impact does fade away if you have a stable credit score. The debt-to-income ratio is reduced dramatically.
The total amount of debt you owe compared to the credit you possess is called your .
The only downside of bankruptcy is that it can stay for as long as ten years on your credit report.
Are you worried the signs of debt and bankruptcy on your credit report will stay forever? Dont be alarmed. They will be removed after the allotted bankruptcy period is over.
A year or two down the line, lenders will eventually start looking past your bankruptcy and focus on your current credit score.
Best Secured Credit Cards For Post
If you dont qualify for an unsecured credit card or prefer setting your own credit limit through a deposit, secured credit cards are a great option. Because the card is secured by your deposit, there is less risk to the issuer should you become unable to repay your balance. As a result, secured credit cards tend to have very flexible credit requirements, meaning almost anyone can qualify for a secured card.
One of the reasons secured credit cards can be preferable to unsecured cards is the ability to obtain a much higher credit limit. Unsecured cards for poor credit tend to cap limits in the low hundreds of dollars, while some secured cards offer the ability to obtain a credit limit as high as $5,000 so long as you can make a deposit of that amount.
A high credit limit can be very helpful for your credit score, especially if you tend to make large or frequent purchases. Thats because your utilization rate, or the ratio of available credit to debt, can be worth up to 30% of your FICO credit score. A higher credit limit can help you maintain a lower utilization rate, which is better for your credit score.
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Dispute Any Items On Your Credit Report That Seem Suspicious To You
Sometimes, credit bureaus and lenders make mistakes. People often pay for these mistakes and dont even know it because their credit report might have errors that theyre unaware of!
To have as much control over your credit as possible, you need to be aware of whats actually on your credit report. If you havent, get your free annual credit report from each of the three credit bureaus. Youre entitled to receive a credit report from each credit bureau once per year by law. Learn more about the Fair Credit Reporting Act !
Once youve taken a look at each of your credit reports, look for items that you dont recognize. If you see any, its time to start the dispute process. To do so, youre going to need to call each of the credit bureaus that are reporting the item in question and file a dispute claim. This process can take some time. If the item in question is indeed incorrect or fraudulent, then you can have that item removed.
Freeze your credit if you dont plan on taking out new loans in the next year.
One ounce of prevention is worth a pound of cure, and the best way to prevent problems from occurring on your credit report is to make sure that nobody can take out debt in your name.
To freeze your credit, you will need to contact each of the three credit bureaus. To do so, click the below links to be redirected to the Equifax, Experian, and TransUnion websites and follow the directions provided.
Can I Max Out My Credit Card Before Chapter 7 Bankruptcy
If you have made the decision to file for bankruptcy, you should not incur additional debt that you do not intend to repay. If you choose to incur debt after you have decided to file for bankruptcy that can have negative ramifications. Especially if the purchases are luxury purchases such as fine dining, entertainment, jewelry, discretionary travel, etc.
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Qualifications For Filing Bankruptcy For Credit Card Debt
If you want to file Chapter 7 or Chapter 13 bankruptcy, there are qualifying standards to meet, most of which are intended to determine whether a consumer is capable of handling the debt themselves. People wanting to file Chapter 7 bankruptcy must pass a means test and those trying to file Chapter 13 have strict amounts of debt they cant exceed.
The means test for Chapter 7 involves two considerations. You can pass the test if your income over the previous six months is under the median income for your family size in the state you live. The majority of Chapter 7 filers pass the means test this way.
If you dont, then you move on to the second consideration: Is there enough income left over to pay down your debt, after deducting expenses for essential items like rent, food, clothing, transportation, utilities, etc.
If there is enough money left, you will be dismissed from Chapter 7 and referred to filing for Chapter 13. If there isnt enough money left over, you may qualify for Chapter 7.
In Chapter 13, the qualifying debt amount for an individual cant exceed $419,275 for unsecured bills and $1.257 million for secured debt . Be careful with both categories of debt. If you have fallen behind on payments, your totals may exceed the allowed amount.
What To Do Before You Apply For Credit Cards After Bankruptcy
There are a few things you can do before you apply for post bankruptcy credit cards in Canada to make sure youre in the best position to qualify:
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Will Taking On Debt Too Soon After Bankruptcy Hurt My Credit
Not necessarily. While taking out a new credit account may improve your credit, accumulating a lot of debt on the card is not a good idea.
This is true for everyone, not just bankruptcy filers. This ties back to the credit utilization ratio mentioned earlier.
If your utilization rate is kept at a healthy level, such as the recommended 30% or lower, lenders wont consider you to have unmanageable amounts of debt. Its when your utilization rate shows that you have more debt than available credit that your credit score begins to see negative impacts.
Example of credit utilization across three different cards.
Using a credit card responsibly really is as easy as paying your bill on time and keeping your credit card balance low. Its even better if you can pay it off each month, but a little credit card debt will not hurt your credit, so long as its manageable.
How Bankruptcy Impacts Your Credit
, but it may not be as long as you think. While bankruptcy can impact your credit score for a while, time heals your credit reports.
If you filed Chapter 13 bankruptcy, the good news is that your bankruptcy is only listed on your credit reports for up to seven years, starting from the date that you file. Since Chapter 13 typically lasts either three or five years, you only have two to four years of it being reported on your credit reports if everything goes well. Once it falls off, thats it no more negative impact from the bankruptcy on your credit score.
Chapter 7, though, can remain on your credit report for up to ten years starting from the date you file. This type of bankruptcy is much shorter, generally only lasting four to six months. Its known as the liquidation bankruptcy and your assets are sold to repay your creditors, unlike in Chapter 13 where you work with your trustee to repay your debts. For this reason, Chapter 7 sticks around on your credit reports longer.
However, even if your bankruptcy is set to impact your credit reports for a few more years, it doesnt mean that its impact stays the same during that time. Negative marks lose some of their potency with each passing year, including bankruptcy. It could take a few years for your credit score to fully recover from bankruptcy, but there are some tips we can offer to start you off in the right direction.
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What Is An Unsecured Credit Card For After Bankruptcy
An unsecured credit card, like an unsecured loan or personal loan, is backed by your general assets rather than a cash deposit. If youve experienced a bankruptcy in the past, you may find it difficult to obtain an unsecured credit card right away.
The cards in this review have been selected because they may approve your application even after a bankruptcy, but approval is by no means guaranteed.
However, time heals all wounds. While a bankruptcy will linger on your credit report for seven years or longer, its impact on your credit score will begin to diminish after the first couple of years. In other words, it pays to be patient when applying for a credit card after your bankruptcy, during which time you can improve your prospects by paying your bills on time and reducing your credit card debt.
The credit cards in this review share several characteristics. All may approve your request for a post-bankruptcy credit card, but it depends on the specific circumstances. Things these cards have in common include:
All of these cards report your payments to at least one credit bureau Experian, TransUnion, or Equifax but most report to all three. This gives you the opportunity to raise your credit score by paying on time and keeping your credit card debt to a minimum.
Become An Authorized User
Another way for you to get a credit card after bankruptcy is to become an authorized user on a card account belonging to someone else, such as a partner, parent or close family member. This can be a great option to improve your credit score, since the cards payment history will likely be added to your credit report.
To get the most credit-building power, become an authorized user on a card that has a high limit, low balance and long, positive payment history. If the cardholder has a history of late payments and carrying a balance from month to month, you’re probably better off not adding your name to the account.
Make sure you and the account owner make an agreement up front about how much you’re allowed to spend each month, since they’re ultimately responsible for any debt you incur.
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Do I Qualify To File A Chapter 7 Case
You must meet income requirements to qualify to file a Chapter 7 bankruptcy case. If your average income is below the median income for your state, you should qualify to file a Chapter 7 case. But if your income exceeds the state median income, you may want to talk to a bankruptcy attorney.
If your average income falls below the state median income, it means you pass whatâs called the Chapter 7 Means Test. If you pass the Means Test, you are typically eligible for a bankruptcy discharge under Chapter 7. But even if you fail the first section of the Means Test, you may still qualify to file a Chapter 7 case.
The second section of the Chapter 7 Means Test subtracts allowable expenses from your monthly income. The amount of money remaining after you subtract all allowable expenses is your disposable income. Individuals who don’t have disposable income or who have very low disposable income may still qualify to file a Chapter 7 bankruptcy case.
What happens if I donât pass the Chapter 7 Means Test?
If you don’t qualify for debt relief under Chapter 7, there are a couple of things to consider. You can try talking to a lawyer to make sure you donât qualify. If not, you might consider filing for Chapter 13.
In very few cases does a Chapter 13 debtor repay all their credit card debt. In most cases, the debtor pays a small percentage of their credit card debt to their creditors. Once the debtor completes the Chapter 13 plan, the remaining credit card debt is discharged.