Rebuilding Credit After Bankruptcy
It is possible to rebuild your credit within two years after filing bankruptcy if you are proactive about it. Although the bankruptcy will still show on your credit well after two years, it is just one of many items that factor into your overall credit worthiness.
Before your bankruptcy discharge enters, you may want to consider signing reaffirmation agreements on auto loans and home loans. When you file bankruptcy, the note is discharged. However, the lien on the vehicle or home remains unless you sign a reaffirmation agreement. If you do not sign a reaffirmation, the lender will not report your payments to the credit bureaus. Instead the lenders will report the debt as discharged in bankruptcy even though you are making payments. This is because you discharged the note but not the lien. Signing a reaffirmation will help you rebuild credit because the payments will be reflected on your credit reports. The loan will not show as included in chapter 7. Signing a reaffirmation brings the debt out of the bankruptcy. You will be responsible for any resulting deficiency balance if the loan is not kept current. Therefore, you should have stable employment and/or adequate equity in your home or vehicle before signing one.
You can begin rebuilding credit once you receive a discharge which is entered about 90 days after your case is filed.
Pull a copy of your credit reports from all three credit bureaus. Review the credit reports to ensure all of your eligible debts are reported as included in chapter 7 bankruptcy. Creditors are not required to update your credit report, however, most do. Some creditors will simply remove the debt from your credit and others will leave it in collection status. If you find any debts in collection status, you should file a dispute with the credit bureaus. This site makes it easy to pull your credit and file disputes. You can also hire a company to file the disputes for you which costs about $100 total.
Once you have cleaned up your credit report, you can start applying for new accounts. If you do not have a relationship with a credit union (CU), you may consider opening an account with one. Once you have an established checking or savings account, you can ask the CU about secured credit cards. A secured credit card requires a deposit. If you want a $1000 credit line, you need a deposit of $1000. The secured credit account will report to the credit agencies just like any other revolving account. It is best to keep your credit utilization below 50% of your credit limit. Wells Fargo and Discover also offer secured cards. After two years, most CU’s and Banks will convert the card to an unsecured credit card and refund your deposit. Additionally, most will raise your credit limit each year. Try to open at least three revolving accounts after filing bankruptcy. You should get started on this process right away because the longer an account shows on your credit the more it helps your score.
If you have student loans that are in default, you should do your best to bring them in good standing. The government offers student loan repayment programs that can help make your federal student loan payments more affordable such as the income based repayment (IBR) program. There are some advantages and draw-backs to each program. I am very well versed in all the available programs and offer a flat-rate consultation to review your options.
If you follow the steps above, you should have a credit score in the high 600s to low 700s within two years of receiving your bankruptcy discharge. You can then use your good credit score to apply for a mortgage or refinance. You are eligible to apply for an FHA or VA loan within two years of the date you file bankruptcy and within four years for most conventional loans. These time periods may change. Contact a mortgage broker for more information.
Finally, there are several companies who provide credit improvement services.