How Can I Rebuild My Credit After Bankruptcy?
Bankruptcy has a long-lasting impact on a person's credit rating, and on his or her ability to obtain credit in the future. The impact is not entirely negative. In some cases, filing bankruptcy may actually improve a bad credit rating or eliminate debt that is preventing further offers of credit. In addition, a number of steps a person can take may improve his or her credit after bankruptcy.
Discharge Results in an Improved Debt-to-Income Ratio
Most of the debtors who consider filing bankruptcy already have poor credit histories. Their credit ratings have suffered because of slow payments, late payments, repossessions, extended credit, charge-offs, foreclosures or judgments. After their bankruptcies, however, the discharged debts will no longer count against their income, so their credit may be better after the discharge than it was before. In addition, while a bankruptcy case may remain on an individual's credit report for up to 10 years, late payments stay on for up to seven years, so the effects are similar. Bankruptcy, however, gives consumers a chance to improve their credit faster because they will have an improved debt-to-income ratio after discharge.
Use Credit Cards Wisely
In some cases, individuals may be able to keep one of their credit cards even after bankruptcy. A person may retain a card that he or she already has but that has no debt on it, or he or she may reaffirm a debt on a card, which means that the debtor signs a contract with the credit-card company after filing bankruptcy that says the debt will be paid anyway if the holder is allowed to keep the card. Some companies are willing to agree to these arrangements because they will be paid for the debts, whereas without reaffirming, the debts could be discharged in their entirety in the bankruptcy proceeding and the company would collect nothing.
Often issued to people viewed as higher credit risks, secured credit cards are another option for rebuilding credit after bankruptcy. A secured credit card is issued by a bank, and is backed up by money that is kept on deposit with the bank that issued the card. The bank account is the security for the card. If the bill for the credit card is not paid on time, the bank may use the money in the account to cover the payment. The limit on the card can sometimes be increased by raising the balance of the linked bank account. The issuers of secured credit cards report about their customers to the credit bureaus, just like the issuers of other credit cards, so any subsequent positive payment history will be visible to future creditors. The interest rates for secured credit cards are often higher than the rates for unsecured cards, but secured cards still can be worth the extra cost by virtue of the redeeming value of the new and reported financial stability.
Still another way to re-establish credit after a bankruptcy is to obtain a loan with a cosigner whose positive credit convinces the bank or other lender that the loan is a safe bet. As payments are made on the cosigned loan, the positive credit history affects both borrowers.
One credit-improvement method to avoid after bankruptcy is seeking help from an unscrupulous credit-repair service. Many consumers pay substantial sums of money to so-called "credit clinics" to "fix" their credit reports when, in actuality, only time and wiser consumer behavior can improve bad credit. A credit-repair service or clinic can legally do nothing that a consumer cannot do on his or her own, for free. Some credit-repair companies actually encourage consumers to commit fraud by attempting to create a second identity. The Federal Trade Commission (FTC) has investigated these often-fraudulent services and warns consumers to be wary of promises that seem shady or too good to be true.
In order to make the most of a bad situation, a debtor must learn from bankruptcy and demonstrate greater financial responsibility in the future. An experienced bankruptcy attorney at our firm can offer valuable advice about how credit can be improved after a bankruptcy, and how to work toward a better financial future.
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