Many people assume that because they have filed bankruptcy, their credit is ruined, and they will not be able to qualify for any loans. This is not true. There are a number of steps you can take to improve your credit score and to make it likely that you can be approved for a loan.
Chapter 7 bankruptcy:
In this type of bankruptcy, your non-exempt assets (if any) have been liquidated to pay off a percentage of your debts. You have been through a process to have your debts discharged.
Pros:
- Because you are no longer overwhelmed with creditors and debts, you may be able to save money for secured loans or secured credit cards. (More on both of those below.)
- Because filing for bankruptcy stops ongoing negative reporting for old delinquent debts, it provides you with a starting point so that you can start to reestablish credit.
Con:
- Chapter 7 bankruptcy stays on your credit report for 10 years.
Chapter 13 bankruptcy:
In this type of bankruptcy, you and the bankruptcy trustee make a structured plan to pay off a percentage of your debts over a 3-5 year payment plan under the court’s protection.
Pro:
- Chapter 13 bankruptcy stays on your credit report for a maximum of 7 years, so you have a shorter time to wait before the bankruptcy rolls off your credit.
Con:
- Because you are on a repayment plan, you may need to work with the courts to get permission to borrow additional money while in your active Chapter 13 plan.
Whether you filed for Chapter 7 or Chapter 13 bankruptcy, you will want to raise your credit score to make it easier to secure a loan. (In a Catch-22 irony, securing a loan will help you improve your credit score.)
The components of your FICO credit score and weight of importance:
35% Payment history
30% Amounts owed
15% Length of credit history
10% Credit mix
10% New credit
Steps to take to raise credit score after bankruptcy:
- Get a secured credit card. A secured card is one where you put down a certain amount of money with the bank to guarantee your repayment. For example, you may put down $500. This is your limit. You are no risk to the bank because they already have your money.
Tips:
- Make sure that the credit card reports to the credit reporting agencies. This is the whole point of having it.
- Use the card sparingly, and keep a low balance, as you don’t want to spend your limit or have large purchases affect the “amounts owed” portion of your credit score.
- Pay off the amount due in full each month.
- Get an unsecured credit card. An unsecured credit card doesn’t require a security deposit for approval.
Tips:
- Beware of fees.
- Read the fine print about APR (annual percentage rates). Some rates are promotional only and increase greatly after a few months.
- Keep a low balance within each month.
- Pay off the amount due in full each month.
How to obtain a personal loan:
- Get a copy of your credit reports (Equifax, Experian, and TransUnion). You can make a free inquiry here. Make sure that the information is accurate and that all discharged debts are noted as such.
- Determine your debt to income ratio (DTI). This is your monthly debt payments divided by your gross monthly income. You will need pay stubs, bank statements, and tax returns to prove this to your potential lender.
- Prequalify through several lenders. This will not harm your credit score.
- Compare the loan offers by examining such things as the APRs, fees, and loan terms.
- Make a formal application with the lender you choose. You will need all of the documentation mentioned above.
Tip:
- Credit unions often offer better rates than banks because they are non-profit organizations.
If you are not unable to qualify for an unsecured loan:
- Apply for a secured loan. You will need to use collateral for this, such as money (why would you try to borrow money if you already have money? Because you are trying to build credit) or the title to your car.
Con:
- You could lose your money or car if you default on a payment.
- Apply for a Home Equity Loan or a Home Equity Line of Credit (HELOC). These loans use the difference between your home’s value and your mortgage balance as collateral.
Pro:
- The interest may be lower than on a personal loan because you have collateral (your house).
Con:
- You are putting yourself at risk of losing your home.
- Ask someone with a high credit score to co-sign your loan.
Pro:
- Lenders will be more willing to lend money when they know that the co-signer has good credit. There is not as much of a risk for them.
Cons:
- Your co-signer will be responsible for paying back the loan if you don’t.
- Additionally, if you default, the lender can garnish the wages or sue the co-signer if the debt is not paid back in its entirety immediately.
- Not only could this damage your co-signer’s credit, but it would undoubtedly damage your relationship.
An experienced bankruptcy attorney can work with you to help you maneuver the intricacies of life after bankruptcy.
At Sawin & Shea LLC, we are committed to providing compassionate and non-judgmental representation to all of our clients. Our attorneys have helped thousands of people just like you get the fresh start they deserve. We are here to help.
