Rebuilding Credit After Bankruptcy

Completing the bankruptcy process is hard, especially if your financial problems stem from medical bills, divorce or death of a loved one. Healing financially will help you get back on track.

Saving Money after Bankruptcy

If your debts have been discharged and you are employed, you should have room in your monthly budget to contribute to a savings account. Set aside three months of living expenses into a savings account. This savings should be able to cover food, mortgage/rent, transportation, and utilities in the event of a job loss or other unexpected issue. Remember, you cannot file bankruptcy again for several years and credit may be hard to acquire. Savings is going to be your best option for emergency monies.

Rebuilding Credit after Bankruptcy

When you emerge from bankruptcy, you’re score will likely be in the low 500s. While a Chapter 7 bankruptcy will remain on your credit report for 10 years and a Chapter 13 bankruptcy will remain for 7 years, the impact of the bankruptcy on your score will diminish with each year that goes by.

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 giving your credit report positive data in the years following bankruptcy to build up from a score. The best way to do this is to get a secured credit card from a bank.

A secured credit card is a card that is backed by a deposit of typically $500. You make the deposit and are provided with a credit limit equal to the deposit.

For the best possible score, you want to use only 30% of your available credit (if your limit is $500, never use more than $150 each billing cycle). Always pay your balance in full and on time when you get your bill.

Every time you pay your secured credit card on-time, you will receive positive points on your credit report that will help counter balance the negative effect of the bankruptcy.

Aside from starting to use credit again in a careful way, you should regularly review your credit reports from Experian, TransUnion and Equifax to make sure the debts discharged in bankruptcy are properly denoted

Recently, the New York Times has reported that large numbers of bankruptcy filers have found their discharged debts reporting as

Buying a Car after Bankruptcy

You will not be able to get a car loan until your debts are discharged.

After discharge, you may want to finance the purchase of an automobile. However, with a recent bankruptcy, you may not qualify for a loan, or if you do, the interest rate may be very high.

It is important to understand the impact your credit score has on your monthly payment. Did you know that with a low credit score, you’ll likely pay interest of almost 17%, compared with 3% for a high score? On a $20,000 automobile purchase, this amounts to paying 5.5 times more in interest ($995 vs. $5552 in interest over a 3 year period).

Consider buying an inexpensive car in cash, if you can, for the first few years after your bankruptcy. If you cannot afford to do this, purchase an inexpensive used car for $4000-$6000, so that your monthly payments will be low, even if you have a high interest rate.

Your new auto loan is a way for you to establish better credit (and hopefully lower your interest rate in the near future). Make sure your monthly payment is affordable and always made on time. A history of on-time payments will help you rebuild your credit score. One missed payment can drop your score more than 50 points.

Buying a Home after Bankruptcy

The mandatory waiting period before applying for a conventional mortgage loan is four years after filing for Chapter 7 bankruptcy and two years for a Chapter 13 bankruptcy. You can apply for an FHA loan 2 years after Chapter 7 and one year after a Chapter 13 bankruptcy. FHA-loans are guaranteed by the government and can have lower interest rates than conventional.

Regardless of how many years it has been since your discharge, the minimum credit score to be considered for a mortgage is 620.  According to the New York Times, it can often take up to 5 years to grow your score to 680 where better rates become available.

If you do not have an optimum credit score, you should wait to buy a home. One to two additional percentage points can cost you thousands of dollars over the term of your loan.  If you must buy a home with a lower credit score, be sure to buy something that is affordable, even at a higher interest rate, and make sure you have a solid emergency fund in place, in addition to down-payment funds.

After Bankruptcy: What You Need to Know

InCharge has created a Life After Bankruptcy eBook to help with issues like rebuilding credit. Download a free copy of Life After Bankruptcy.


Sources:

NA, Bankrate. Can I Buy a Car After Filing Chapter 7? Via: http://www.bankrate.com/finance/debt/can-i-buy-car-after-filing-chapter-7.aspx

NA, Experian. Secured Credit Card Can Help Build Credit History and Credit Scores. Via: http://www.experian.com/blogs/ask-experian/secured-credit-card-can-help-build-credit-history-and-credit-scores/

NA, FICO. Loan Savings Calculator. Via: http://www.myfico.com/CreditEducation/Calculators/loanrates.aspx

Prevost, Lisa. New York Times. Mortgages After Bankruptcy. October 30, 2014. http://www.nytimes.com/2014/11/02/realestate/mortgages-after-bankruptcy.html