Restoring credit after bankruptcy
In most cases, the ONLY disadvantage to filing for bankruptcy is the effect on credit. However, bankruptcy can actually be positive for the credit in the long term. Skeptical? Let me explain.
Credit reports contain a lot of information. Most of the information, in some way, has an impact on the credit score. Some factors are weighed more heavily the others. Bankruptcy is just ONE FACTOR of many which goes into the calculation of the credit score.
It is fairly rare that a prospective bankruptcy client comes to us with perfect credit. For the most part, clients have missed payments to creditors, have a large amount of debt, and have maxed out credit limits. All of these factors will negatively impact the credit score. In fact, the credit score will progressively decrease each month as balances grow, late payments are reported, and credit limits are exceeded.
WHAT HAPPENS TO CREDIT UPON FILING FOR BANKRUPTCY?
Immediately when a bankruptcy case is filed, the majority of creditors must make a final report to the credit bureaus that your account is included in bankruptcy. The key phrase here is “final report.” Without the bankruptcy case, the creditor will continually report the account as late, which is a perpetual cycle that damages your credit score. With bankruptcy, the constant negative reporting stops. For many clients, bankruptcy is the only event that can stop the cycle.
It is true that Chapter 7 bankruptcy places a 10 year mark on the credit report (Chapter 13 cases appear on the credit for 7 years). The impact that the bankruptcy has on the credit score depends on the score that you have BEFORE filing. If you already have a low score before the bankruptcy is filed, there will be LITTLE impact on the score from the bankruptcy.
Bankruptcy can open the door to an improving credit score. Remember, bankruptcy is just one credit factor of many. And the negative effect of the bankruptcy case diminishes over time.
IMPROVING CREDIT AFTER BANKRUPTCY
The more time that passes from the date of the bankruptcy discharge, the less the bankruptcy will affect the credit score. The more clients can demonstrate that they can use credit without lapsing into late payments and chargeoffs, the faster the credit score will improve after bankruptcy.
In order to improve credit, you must first resolve to make the bankruptcy case the last negative credit reporting factor of your lifetime. Every succeeding report to the credit bureaus must include only positive information.
Second, you must positively manipulate the non-bankruptcy credit score factors. Just by filing the bankruptcy case, you have eliminated some negative factors – that is, late reporting, defaults, and increasing debt to credit ratios. But, there is more work to be done.
If you have accounts that survive the bankruptcy, such as mortgage accounts, auto loan accounts, or student loan accounts, you are very lucky! Paying such accounts on time, every month, is the easiest way to improve the credit score after bankruptcy. You MUST pay these accounts on time once the bankruptcy case is filed. Each and every month that you do this, you receive a positive report on the credit file, and that helps the credit score.
Clients who have accounts survive the bankruptcy can often still benefit from adding accounts which will report positive information. Clients who do not have any credit after the bankruptcy is over MUST add accounts.
What types of accounts can be opened after the bankruptcy case?
AUTHORIZED USER ACCOUNTS
Authorized user accounts are a great way to improve credit after bankruptcy. In order to become an authorized user, find a friend or relative who is willing to have you listed on his/her credit card account as an authorized user (simply by calling the issuing bank’s customer service line). Authorized user accounts can have the same impact on your credit as if the account was solely yours. Before you ask to be an authorized user, do some research. You want to ensure that this is an account that is: a) always paid on time AND b) has a low balance relative to the credit limit. The last thing you want is to be added to a bad account which will generate negative information on your credit file. The great thing about authorized user account is that you can be removed from the account at your discretion – which means if the account does go bad, you can quickly eliminate the problem with one phone call.
SECURED CREDIT CARDS
The only difference between secured credit cards and standard credit cards is that with secured cards, clients must pay a security deposit in order to open the account. Clients should open 2-3 secured credit cards and use only up to 50% of the credit limit each month, paying the full balance off at the conclusion of the month. Clients who do this each month will receive valuable, positive marks on the credit report. For reviews of secured credit cards, go here: Secured credit card reviews
We prefer to think of bankruptcy as not the end of our clients’ credit, but a new beginning. Diligent work after the bankruptcy case is over can result in fast improvement to the overall credit score, which could open the door to opportunities such as home ownership, and create thousands of dollars of savings in the form of drastically lower interest rates.