Contents
Bankruptcy Fundamentals
Gathering Your Financial Info
How to Find a Bankruptcy Lawyer
Should You File Chapter 7 or 13?
Exempt Property in Bankruptcies
Mandatory Credit Counseling
How to File for Chapter 7 Bankruptcy
How to File for Chapter 13 Bankruptcy
How to Get Credit After Bankruptcy
How to Improve Your Credit After Bankruptcy
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How to Get Credit After Bankruptcy
Though bankruptcy is often equated with financial ruin, the opposite is often true. For many debtors, bankruptcy is the first step toward a more rewarding and financially responsible life. Even so, no one should file for bankruptcy without a clear understanding that, despite its benefits, filing for bankruptcy will also have real and long-lasting negative consequences on your finances. The most debilitating financial effect of bankruptcy involves your ability to borrow money from banks, credit card issuers, and other lenders.
How Bankruptcy Affects Your Credit
Your credit report is an official written record of how you have used and managed credit (borrowed money) in the past. Every time you apply for a loan, lenders examine your credit report to assess your “financial reputation.”
- If your financial reputation is good, lenders will want to lend money to you and will offer you the lowest available interest rates.
- If your financial reputation is bad, lenders may be less willing to lend you money. If they do lend you money, they’ll do so at high interest rates to protect themselves from the risk that you won’t pay on time and in full throughout the life of the loan.
Chapter 7 bankruptcies usually remain on your credit report for 10 years after your discharge date; Chapter 13 bankruptcies, for seven years. Any bankruptcy on your credit report can automatically give you a bad financial reputation, even if your financial record since your filing date has been stellar.
Why Your Financial Reputation Matters
In particular, bankruptcy can reduce your:
- Access to credit: Some, though not all, lenders will simply refuse to lend money to people with a bankruptcy on their credit report.
- Access to large amounts of credit: Many lenders will agree to lend to people with a bankruptcy on their credit report, but only in small amounts. Since most people use credit to finance major purchases, such as a car or home, having access to only a few thousand dollars’ worth of credit often won’t suffice.
- Access to credit at low interest rates: People with good credit receive lower interest rates, which can result in enormous savings. For instance, a person with good credit may be able to get a mortgage at an interest rate a full 1% lower than someone with bad credit. Though 1% seems insignificant, over time that difference adds up to tens of thousands of dollars.
How to Get Credit After Bankruptcy
Despite the negative effects bankruptcy has on your credit rating, you can still get credit afterward. The most difficult time to get credit is immediately after you file, but over time lenders will feel less anxious and will offer you loans at rates approaching those available to borrowers with better credit. Generally, you should wait at least 18 months after your filing date before trying to get new credit. At that point, your wisest step is to apply for a secured credit card.
Secured Credit Cards
Secured credit cards are credit cards that require you to deposit a certain amount of cash into a savings account to which you and the credit card company have access. This cash deposit serves as collateral against your credit limit, the amount of credit that the secured card gives you. If you fail to pay your secured credit card bills, the company that issued your card can withdraw funds from your savings account equal to the amount you’ve failed to pay.
Secured credit cards look just like regular, unsecured credit cards. The amount of money you must deposit varies but usually equals 50–100% of the credit limit (though some lenders require only 10–20% of the credit limit).
Why You Should Get a Secured Credit Card
Getting a secured credit card is step toward improving your financial reputation after bankruptcy. If you’ve managed to pay all your bills for at least 18 months after bankruptcy and you have enough money to put down a deposit for a secured credit card:
- Apply for a secured credit card: Work only with a reputable bank that you trust. Scams offering “easy credit” with “no money down” are common.
- Use the card: Don’t hesitate to use the card—use it for inexpensive, everyday items that you’re sure you’ll be able to pay for when your credit card bill arrives.
- Pay off the balance on your card in full: Never pay just the minimum required monthly payment—always pay off the entire balance each month.
- Contact your secured credit card company: After paying your balance in full each month, request a clean credit letter from your creditor that certifies that you’ve have paid all required bills on time and in full.
After completing this process, you’ll have proof that you can manage credit responsibly, and you’ll begin to get additional credit more easily and at better interest rates.
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