You will qualify for credit after your bankruptcy case is over, often much sooner and with much less hassle than you might think.
Remember that your credit score is calculated by private companies called credit reporting agencies – the main three agencies are Equifax, Experian and Trans Union.
Companies that lend money such as credit card banks, mortgage companies and vehicle finance companies pay the credit reporting agencies to determine how much risk for default or slow pay that you pose.
Some of the factors that go into your credit score include:
- how much total debt do you have?
- how many open accounts do you have and how long have you had them?
- what is your history of on-time repayment?
- how many late pays or defaults do you have on your credit report?
- how many credit inquiries do you have?
Why Your Credit Score will Improve After Your Bankruptcy
When you file and complete a Chapter 7 or Chapter 13, your score for many of these factors will improve.
First, following bankruptcy you are likely to have little or no outstanding debt. This means that you are more likely to have disposable income to pay a new creditor.
Second, post-bankruptcy you are likely to have very few, if any, open accounts. This means that you have no credit lines you could access.
Third, the bankruptcy law makes it difficult to refile a new case following discharge. For example, you have to wait 8 years before you could file a second Chapter 7.
From a lender’s standpoint, a person with little or no debt who cannot legally file bankruptcy for many years is a better risk than someone who has not filed, but could do so at any moment, who is struggling with tens of thousands of dollars of debt.
While it is true that your post-bankruptcy credit profile will show that you have defaulted on some obligations, lenders compensate for this by charging higher interest rates or limiting your credit line.
Our experience has been that many (but not all) credit card lenders are happy to issue credit and some are downright aggressive in approaching you to sign up for new credit. It is not unusual for me, as a bankruptcy attorney, to receive credit card solicitations from large and legitimate credit card lenders to pass along to my clients.
Qualifying for a mortgage or a motor vehicle can be a bit more challenging because the amounts loaned are larger. Generally speaking, we recommend that our clients obtain one or more credit cards (unsecured debt) and use this credit modestly. Every payment should be made on time.
After about a year of paying credit card debt in a timely fashion, most of our bankruptcy clients will qualify for a vehicle loan or mortgage. You can improve your chances at qualifying if you have a long standing job, or if you can provide a co-signer.
Your Credit Score may be Too Low Because of Errors in your Credit Reports
Finally, you can take one simple step to help your credit bounce back – check your credit reports for errors. In Georgia, we are allowed to request twice a year free copies of our credit reports from the three national credit bureaus. You can download your credit reports at www.annualcreditreport.com or you can request copies by mail.
If your credit report shows an outstanding balance for a debt that was discharged in bankruptcy, you have the right to demand that this error be corrected – and you may be entitled to cash damages from the creditor making the incorrect report. We have seen our clients’ credit scores jump significantly when errors like this are corrected.
How Fast will You See Your Credit Score Bounce Back?
You may be wondering about how quickly your credit score will bounce back to the point where you can qualify for a credit card, a mortgage or a vehicle loan.
If you file and complete a Chapter 7 case in the Northern District of Georgia, and receive a discharge – a process that takes about five months – you are likely to qualify for a modest credit card either immediately or within a month or two following discharge. Our experience has been that you will qualify for a mortgage or vehicle loan within six months to one year following discharge.
Special Considerations for Credit While in Chapter 13
If you file a Chapter 13 repayment plan, you will be in bankruptcy for up to five years. Generally speaking, the local rules in the Northern District of Georgia prohibit you from applying for any new credit while your Chapter 13 is still active. However, you can ask your judge for an exception if you can show a specific need.
For example, if you travel for a living and need a credit card to pay for flights or hotels, your judge is likely to approve your application for new credit.
Similarly, if you need to incur new debt to purchase or refinance your home or to buy a replacement vehicle, you would need to apply for special permission from the judge. Our experience has been that if you have been paying into your Chapter 13 plan for at least two years, you will be able to find a mortgage or vehicle lender willing to extend credit.
When you complete your Chapter 13 after five years of regular payment and you receive your Chapter 13 discharge, you will most likely qualify for a small limit credit card immediately and a mortgage or vehicle loan in about eight to twelve months after discharge.
All References to Bankruptcy Disappear after Ten Years
Finally, federal law does mandate that any reference to your Chapter 7 or Chapter 13 bankruptcy must be deleted from your credit report no later that ten years after you file. Generally speaking you will have access to credit long before ten years runs, but ten years is the maximum time Chapter 7 or Chapter 13 will appear on your reports.