||Ask Dr. Don
Rebuilding credit after a
Chapter 13 bankruptcy
Dear Dr. Don,
I have been discharged from my Chapter
13 bankruptcy for seven months. I want to get a personal loan for
about $5,000 to re-establish my credit. What is the best way to
do this? I would like to write a letter explaining why I had to
file a Chapter 13, but I need some help writing it.
Congratulations on completing your Chapter 13 repayment plan
and the subsequent discharge of any remaining eligible debts by
the bankruptcy court. According to Nolo.com, only about 35 percent
of those filing a Chapter 13 bankruptcy petition successfully complete
their repayment plan.
With the exception of a Chapter 7 bankruptcy filing
that stays on your credit report for 10 years, negative information
stays on your credit report for seven years. A Chapter 13 repayment
plan lasts from three to five years so your negative information
is aging nicely but you won't have to wait for the information to
drop off before you can qualify for credit.
Under provisions of the Fair
Credit Reporting Act, you can include a letter of explanation
in your credit report when you've disputed an item in your credit
report and the dispute wasn't resolved in your favor. That doesn't
describe your situation so you won't be able to include an explanatory
note in your credit report.
With a bankruptcy filing on your credit report you
are a "story" credit. That means that you will have to
sell the lender on your story before they'll consider loaning you
money. While putting your thoughts to paper is a good way to distill
what happened into a few paragraphs, I'm going to discourage you
from including the letter with any loan applications. It's not likely
to tip the scales in the loan decision and it becomes part of the
file on the account.
Be selective about where you apply for credit. Don't
fill out a lot of loan applications because every application will
show up on your credit report as a loan inquiry. An inquiry will
stay on your credit report for two years. The more times you are
rejected, the harder it becomes to get the next lender to say yes.
Put together a plan. Start out by getting a copy of your credit
report and credit score. Bankrate provides contact
information for all three credit bureaus. Also take a look at
things you never knew about your credit report."
Look at your existing financial relationships and,
if they offer personal loans, guesstimate whether the relationship
is strong enough that they would be willing to loan you $5,000.
Talk to a loan officer personally before filling out a loan application.
If you are eligible for membership in a local credit union, that
would be a good place to start shopping for a personal loan.
Getting a $5,000 personal loan and showing a consistent
repayment history will help you rebuild your credit. How are you
going to spend the $5,000? (Trick question -- you should keep the
money in a savings account and pay down the loan over time from
the account balance.)
If you can't get a conventional loan, then consider
a secured deposit loan or a secured credit card. What I like about
either of these approaches is that it shows that you have the financial
discipline to live within your means plus raise the deposit. The
deposit is the loan's collateral, so the lender isn't taking on
a financial risk and you can generate a repayment history for your
-- Posted: June 4, 2003