Attorney at Law
Repairing Your Credit After Bankruptcy
A Chapter 7 bankruptcy stays on your credit for 10 years, and a Chapter 13 stays on your credit for 7 years. However, your credit score is only one of the factors that lenders look at when deciding to extend credit, and bankruptcy is only one of the factors that help determine your credit score. Other factors that affect your credit score include your payment history, the amount of money you owe, the length of time you've been in the credit system, the kinds of credit you have used in the past, and the amount of credit you've applied for recently. Apart from all these factors, there are other factors that banks look at when deciding whether to make loans that have nothing to do with your credit score. These factors include your debt-to-income ratio (which is improved by bankruptcy), your employment history, address history, and the amount and kind of property that you own.
Assuming you had to file bankruptcy, you should make affirmative efforts to repair your credit once your bankruptcy is over. If you do not use credit and use it responsibly, your credit situation will not improve. In my opinion, rather than taking out new loans the best way to improve your credit after bankruptcy is to continue making payments on your house or car. Unfortunately, however, these payments will not be reflected on your credit report unless you signed a reaffirmation agreement, which is an agreement that gives creditors the right to report this kind of information. Not everyone is eligible to sign a reaffirmation agreement, and the bankruptcy court will not permit reaffirmation of loans you cannot prove to the court you can afford. If you are not eligible for a reaffirmation agreement you can usually still keep your house and/or car if you are willing to continue making payments, but those payments will not be reflected in your credit report or help improve your credit score.
If you do not currently have a home loan or auto loan that can help improve your credit after bankruptcy, there are other options. Automobile financing companies are anxious to make loans to many people post-bankruptcy because they do not owe money to other creditors anymore and the auto financing company does not need to worry about standing in line behind other creditors to get paid. Secured credit cards, which are credit cards with a maximum balance that only goes up to an amount you put on deposit with the issuing bank, are another option. However, if you plan to use secured credit cards to rebuild your credit, make sure that the bank that issued the card reports to the credit reporting agencies-- not all of them do. A third option is to use credit at stores like Best Buy and Home Depot. It is easier to get credit at stores like these because the stores are trying to give you an incentive to buy their goods. Another option that is risky, but very effective when done correctly, is to become a cosignor on a loan taken out by a friend or family member. Just make sure that your friend or family member has a rock-solid ability to pay, because if they do not pay you will be held accountable for the loan. I have seen cases where parents with rock-solid social security and pension income allowed their children to go on auto loans as cosignors in order to help improve those children's credit after bankruptcy.
One common misconception that people have is that they need to carry a balance on their credit cards in order to improve their credit rating. That is not true, and I would not recommend it. The goal is to use credit to improve your credit rating, not to put yourself in a situation where you might get into debt problems again. Use your credit card to make ordinary purchases like groceries and gasoline and pay it off at the end of every month.
I have a computer program that helps estimate people's credit scores one year out from bankruptcy, assuming responsible credit usage. If your credit score is currently in the mid- to low-500's, like many of my clients, you can expect to see an improvement of somewhere between 90 to 110 points. However, if your credit score is higher, the improvement will be more modest. From time to time I do see clients with credit scores in excess of 700 who nevertheless decide to file bankruptcy because the only way they have managed to maintain their credit at that level is by putting a very large amount of their take-home pay towards their credit card debt in a losing battle to pay it off. For those people, bankruptcy will lower their credit score significantly, but in many cases I believe the damage was inevitable because they were in over their heads and certain to default on their credit card payments eventually.
If you have questions about improving your credit score post-bankruptcy, please call me at 440-544-6423 and I will answer those questions at no initial cost to you.