How to Rebuild Credit After Bankruptcy
Bankruptcy can feel like a life sentence for a credit score. The good news is most filers see their score return to near-600 or better within a year, according to recent data from the Consumer Financial Protection Bureau (CFPB); by two years, more than half are in the mid-600’s. In fact, you can begin repairing your creditworthiness in as little as six months. Once the report improves, filers often come to appreciate, rather than regret, the virtual “blank slate” Chapter 7 discharge offered.
If you’ve filed, or are preparing to file, for Chapter 7 bankruptcy, there are a number of steps you can take to quickly repair your credit. In general, rebuilding your creditworthiness comes down to quickly securing a line a credit you know reports to bureaus responsible for scoring; carefully maintaining a low balance, while still using your credit; and actively monitoring your credit score throughout for errors and discrepancies. There are pitfalls, such as receiving too many application denials too quickly, or not correcting errors on your report in a timely manner. Once you understand the basics, however, it becomes easier to fix your credit.
Credit reporting works by analyzing your ability to repay debt. This ability is quantified in two ways. The first way–and simplest, immediately following a Chapter 7 discharge–is a low debt load relative to income. Chapter 7 will discharge most, if not all, of your current debt, making this a bigger issue later in your creditworthiness quest. The second way reporting agencies analyze your creditworthiness is through your demonstrated history of repaying debts, such as making card payments. Though it may seem paradoxical, that’s why it’s important to secure new credit as soon as possible following discharge. But you have options, such as getting someone to cosign on a new loan. Above all, you need to manage that new debt carefully–federal law prohibits another Chapter 7 bankruptcy discharge filing before eight years have passed from the previous one.
Your lawyer might offer additional information about fixing your score, particularly in relation to the details of your filing. For most, however, your lawyer will primarily focus on managing the bankruptcy case itself. Most of these cases allow people to easily improve their scores on their own, following discharge
First steps to repairing credit after your bankruptcy
Before you do anything else, stay on top of any obligations not discharged by your Chapter 7 filing. Typically, these include student loan payments, child support obligations, alimony, back taxes, monetary court judgments and any debt you chose to reaffirm through the bankruptcy. Reaffirmed debts might include payments on a loan for a car that you use to commute to work. Failure to continue these payments will further damage your ability to repair your creditworthiness.
** Read out 8 Tips to Repairing Your Credit blog post for in-depth information on this topic **
One building block to rebuilding your score is employment. Stable employment is necessary to fix your credit in earnest. Before you apply for any kind of loan, you need to start generating consistent income. If you were employed when you filed for Chapter 7, then you’re already in a great place to repair your credit. Where possible, some experts recommend avoiding changing employers while rebuilding your credit. Multiple job changes can reflect poorly on your ability to repay. However, that warning should mostly apply to those leaving for similarly-paying jobs. For those taking a better job, an increase in salary or pay rate will likely counteract any negative impact from the change of employers. You should check with your attorney if you are unsure whether to take a new job.
Securing your first credit line
Though difficult, rebuilding your score means getting a new line of credit as quickly as possible following discharge. This can seem like a “Catch-22”–you need creditworthiness to build creditworthiness. As such, your first post-bankruptcy credit line will typically carry a high-interest rate or will come from a “secured” line. Secured lines work by requiring you to lay down a deposit equivalent to the credit line. For example, you’ll provide a deposit of $500, in exchange for a card chargeable up to $500. This might seem like the proverbial money-from-one-pocket-to-the-other, but the key to this other “pocket” of income is that the secured money spent counts towards your score.
Other options available to rebuild credit include:
- Retail store cards
- ”Credit builder” loans
- Asking a friend or relative to cosign
- Becoming an “authorized user” on an existing card
Whenever you have someone cosign for a card or loan, remember to choose someone whom you can trust and who has, themselves, maintained good creditworthiness. Likewise becoming an “authorized user” should only be an option for accounts owned by someone you have direct access to and whom you feel you can trust. A breakdown in their creditworthiness is breakdown in yours.
Whatever option you find, it’s important to check that the company reports to the three bureaus that track scoring–Equifax, Experian, and TransUnion.
Keys to Managing Your Credit After a Bankrtupcy
Once you have renewed access to credit-building tools, it’s important to manage them carefully. The keys to this are:
- Use the card regularly but …
- …keep a low balance and…
- …make regular, timely payments.
A new card or loan won’t help your score if you don’t use it. However, immediately maxing out the card will hurt your ability to repair your score, as the reporting agencies will see your debt-to-income ratio increase. The ideal scenario is to use your line where you would normally use cash, but immediately plan to pay off all or most of the balance on the next billing cycle. If you have a gas station card, for example, fill your tank as you normally would using the card. In this way, you’re not spending money you wouldn’t otherwise have spent, but you’ll receive the benefit of having the payment reported for your score.
** Read out 8 Tips to Repairing Your Credit blog post for in-depth information on this topic **
Monitor your credit report
Though not necessarily common, it’s not unusual for mistakes to appear on your report. Within about six months of discharge, it’s a good idea to seek out the free, full copy of your report with each agency. With this report, check for any mistakes, particularly in how your bankruptcy was reported, as well as looking for any discharged debts that might erroneously still be reported as being in collection. This might be a good opportunity to check with your attorney about what to look for. Your attorney in the discharge might be able to spot discrepancies quickly.
Any errors you find, particularly with regards to the discharge, can usually be handled on your own by reporting them to those scoring bureaus. Alternatively, you can file a complaint with the CFPB, but the bureau’s process is often slower and less definitive compared to direct challenges; it’s best to use the CFPB option only after you have problems with the collection company.
Your attorney might also help in correcting reporting mistakes. They can answer questions, as well as help you secure the right documentation to challenge items that will affect your score.
Avoiding credit rebuilding ‘traps’
When rebuilding after bankruptcy, there are a number of scenarios that can lead down a bad path. Without access to normal credit, “rent-to-own” stores can tempt people into a form of financing that is both expensive, and often doesn’t help in improving scores. Rent-to-own options should be “avoided when other options are available,” according to at least one state Attorney General.
Advance-fee loans are another tempting, low-score option prone to abuse. Companies advertise a loan available for low- or no scores but require an upfront fee. This fee is both illegal and, in some instances, doesn’t result in the promised loan. It’s easier to protect yourself when you have information about your rights.
There are a number of laws on your side for protecting your financial reputation and your right to fair lending. The Truth in Lending Act (TILA) compels potential creditors to provide clear information about lending terms, such as interest rates, fees and the loan amount. Any potential creditor failing to offer this information is likely one you don’t want to work with to improve your score.
The Fair Credit Reporting Act (FCRA) gives you a number of rights, particularly when receiving a rejection from a creditor. The creditor is required to inform you which reporting agency it used to reject your application. Once rejected, you’re also entitled to an additional free copy of your report to review why the rejection may have occurred. If the report used seems inaccurate, FCRA allows for a process to dispute both the inaccuracy and your rejection, with the reporting bureaus and the creditor who rejected the loan. If you feel like you’ve been victimized under one or more of these rules, you might want to contact a lawyer specializing in consumer law.
Knowing your rights under federal law will help you not only fix and improve your score but also prevent further damage. As time goes on and your score improves, you’ll be able to build upon your post-bankruptcy financial success by trading your high-interest cards and loans for ones with better rates. The CFPB found that in just two years, at least half of all people who declared Chapter 7 bankruptcy saw their credit scores improve to well into the 600’s–a score good enough for decent rates, home mortgages and more. By taking just a few steps, you’ll quickly see that the bankruptcy process was not the end; rather, it was the beginning of a bright, new financial life.
Contact Our Long Island Credit Repair Team
For more information on credit repair, and credit repair following your bankruptcy, contact The Law Offices of Adam C. Gomerman today and speak with a team of Long Island credit repair professionals with over 30 years of experience.