FAQ #25: After bankruptcy, what steps need to be taken to rebuild my credit?

First and most importantly, time heals all wounds. Only time can fully repair the damage from a bankruptcy (and being significantly behind on a lot of credit card debt beforehand).

The best thing you can affirmatively do right now is to start developing a history of on-time payments to creditors that report to your credit bureaus. Pay your bills early, or at worst, pay them on time.

Because of the way the bankruptcy system works and the way creditors report reaffirmed debts, you will not get credit for on-time mortgage payments or car payments. Therefore, it is necessary to establish a new account that you can make solid, on-time payments on. We recommend applying for a secured credit card or gas card. Before you apply, take the time to confirm that the card management company reports to all three credit bureaus every month. If they don’t report every month, or if they do not report to all three, go elsewhere. Use the card, but pay it off early or on time, every month. Carrying a small balance (less than $100 is OK), but never utilize more than 50% of the available credit.

If you have a mortgage, then as soon as feasibly possible, refinance your mortgage. Paying off the current loan and keeping a new loan current will, once again, give you credit for on-time mortgage payments.

In addition, as soon as you feasibly can, refinance your car loan, or sell your car and purchase a new car. Again, the key is to obtain a new loan that will report to the credit bureaus. Post-bankruptcy, many current secured lenders will not report payments to the credit bureaus. Of course, be sure to keep that loan current.

Obtain copies of your credit reports approximately 90 days after receiving your discharge. Ensure every debt is reported as “Discharged in Bankruptcy” or something similar. If they are not, send a letter to the creditor and the credit bureau requesting that information be reflected accurately. Remember, your credit report is a list of your “debts”, and right now, you have no debts aside from your house and car (and any non-dischargeable debts). Make sure your credit reports accurately show that, although you had debts discharged in bankruptcy you should not currently owe any money to dischargeable creditors.

Besides paying the above-described loans on time there are also a number of things you should avoid doing:

1. Avoid opening credit accounts with co-signers, if possible. Having a co-signer on an account indicates you are a greater credit risk.

2. Avoid financing with finance companies or sub-prime lenders, if possible. Doing business with these companies can actually lower your credit score.

3. Avoid future financial risk. Bulk up your savings account. Develop a budget, and stick to it. That way, when emergencies or unexpected expenses come up, you can pay in cash, rather than increasing your debt.

4. Some industry experts recommend that you obtain a small personal loan, and use the funds to open a CD account. Pay the loan on time, and when the loan is paid off, you will have some funds in savings, which you can take out once the CD matures. Of course, this only works if you can fit these payments into your budget. Setting up a workable budget should be your first priority.

FAQ #24: If my partner is listed as an authorized user on my credit cards, will his credit be hurt?

This is an interesting question, and the answer often depends on how the information is reflected on a credit report. An “authorized user” is someone who is merely authorized to make purchases on an account, but bears no legal responsibility to repay the debt. Some credit bureaus (TransUnion in particular) often do not report credit accounts to the individual who is an authorized user only; but others sometimes do (such as Experian).

Additionally, not all credit card companies report authorized users to the credit bureaus. If you are an authorized user on a credit account, and that account is discharged, there may be a notation in your credit profile that indicates your prior access to an account, and the fact of that accounts discharge in bankruptcy. While an intelligent loan officer should understand the distinction when making a credit decision, it is important to obtain a copy of your credit report if the primary cardholder files bankruptcy in order to understand how that debt is reporting, and contact the credit bureau in writing to correct any errors.

FAQ #6: Can I buy a house, car or get credit cards after I file bankruptcy?

Once your bankruptcy case is concluded, there are no restrictions on property that you may own or purchase. Any property that is acquired during the bankruptcy proceeding (the period between filing and the closing of the case) must be disclosed to the bankruptcy court by amending the bankruptcy schedules, but after the discharge these limitations cease.

Similarly, you may incur new debt, however, any debt that is obtained after the date of filing is not included in the discharge. As a general rule, it is advisable to not incur any new debt or acquire any new assets until you receive your discharge from the bankruptcy court.

Once you have your discharge, just because you may borrow money or purchase assets, does not mean it will be easy. Bankruptcy filing makes it difficult to obtain the credit required to purchase these items, for some time. Because bankruptcy (and often, the financial difficulties which gave rise to a bankruptcy filing) will make it difficult to obtain credit, many people will be unable to purchase a new home or car, or obtain a credit card for a period of time after bankruptcy.

Taking steps to repair credit (such as establishing a good repayment history on reaffirmed debts or a secured credit card, maintaining a cash reserve, paying debts on time, and borrowing and repaying a small personal loan) can accelerate credit repair. If you take the proper steps to rebuild your credit following bankruptcy, you may be able to qualify for an unsecured credit card, car loan or mortgage in as little as 2 years after your discharge. Eventually, if you budget correctly and manage your credit after your bankruptcy better than before, you will be able to purchase a new home and/or car.

If you don't see your question and would like more information please do not hesitate to call us at 508.655.5980, e-mail us, or attend one of our weekly Free Debt Relief Clinics.