Understanding Bankruptcy and Your Credit

Starting over after filing for bankruptcy can seem overwhelming at times. Rebuilding your financial life and dealing with the emotional fallout of bankruptcy can make starting over seem like an impossible task. Additionally, most people are concerned about the effect their bankruptcy filing will have on their ability to obtain credit going forward. It is true that filing for bankruptcy will have an effect on your initially, however, there are steps you can take to minimize the long-term impact of filing on your credit. If you have more questions or concerns about bankruptcy and your credit, contact our offices today for a free consultation.

The Long-term Effect of Bankruptcy on Your Credit

It is a common misconception that filing for bankruptcy will ruin your credit for up to seven years. This is simply not the case. Often times filing for bankruptcy has a positive effect on your credit rating over time. Bankruptcy gives you a chance to eliminate some of the persistent old debts that you may have been ignoring for a long time. It is the ignoring of theses debt and nonpayment that has actually caused your credit score to tank. By taking control of the situation and wisely dealing with the situation in bankruptcy that you can improve your credit in a relatively short period of time.

Rebuilding Your Credit After Bankruptcy

There are numerous steps available to you in order to rebuild your credit after filing for bankruptcy. After taking the responsible first step and facing you obligations in bankruptcy court many loan companies will be willing to work with you.

Obtaining a New Credit Card:

Many bankruptcy filers are surprised to see that within weeks of filing for bankruptcy, new credit card applications begin arriving in their mailboxes. Obtaining new credit cards and being responsible about paying your balance on time will ensure that your credit score will begin to rise. The key element here being that you pay off the new debts each month.

One way to ensure that you pay off your credit card debt each month and increase your credit score is to get a secured credit card from a company that provides such a service. A secured credit card requires a cash deposit that then becomes the line of credit for the account. For example, if you put $300 in the account, you have a $300 line of credit. Look for secured credit cards that do not charge an application fee and have a low annual payment.

Receiving a Loan:

Car loans are not terribly difficult to acquire after filing for bankruptcy. Most car dealerships are willing to extend a loan to a purchaser but sometimes at a very high interest rate.

Obtaining a mortgage may be more challenging for a bankruptcy filer but not impossible by any means. Again, the importance of beginning to rebuild your credit rating immediately after filing will have the biggest impact on your ability to obtain a mortgage. Traditional mortgage companies may require that you wait four years after your filing in order to apply for a home loan. Two years after filing for bankruptcy you are entitled to apply for a Federal Housing Administration backed home loan. A FHA loan may also charge a higher interest rate then a more traditional company, but you won’t be require to put as much money down.

Other Steps:

Before attempting to obtain credit or a loan after bankruptcy, it may be wise to obtain a credit report which will enable you to understand what credit companies see when they research your current situation.

It is also prudent to avoid cancelling your new credit cards whenever possible. Establishing a history of credit with one company will be very valuable in the long-term.

Create a realistic new budgeting plan and stick to it. Without a workable plan, you may not be able to pay your new obligations on time and thus your credit rating will remain low making obtaining new credit more challenging.