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Coming back from the black hole (of bankruptcy)

When it comes to bankruptcy and credit, filers are down but not out.

Filing for bankruptcy used to be "really taboo," says attorney Michael J. O'Connor, of Albany, N.Y. "You were in credit purgatory for a lengthy period of time and couldn't get any credit at all."

"Financial products today are available to just about everybody. It doesn't take 10 years to re-establish the ability to get financing," explains Chris Viale, president and chief operating officer of Cambridge Credit Counseling Corp.

Although it's ironic, those who undergo Chapter 7 bankruptcy, and thereby shed the responsibility of debt payback, are more likely to be the first that creditors will court. "Chapter 7 clients are getting credit cards, car loans, mortgages a year after [discharge from] bankruptcy," O'Connor has noticed.

Experts say it typically takes two to three years after discharge from a Chapter 13 plan to get credit extended. "It's very difficult to get credit while in the plan. You have to go through the trustee's office for permission to [accept] credit," O'Connor says. And that's "assuming you can find a lender who will give you credit."

Yet it's not impossible. Trustees may grant permission to borrow money for a car or an educational loan, or to refinance your house to pay off debts, says Henry Hildebrand, an attorney and Chapter 13 trustee.

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Generally, your first steps toward credit will "get you back into the B market, not the A market," Viale notes. Expect high interest rates, short repayment terms, and to do some searching.

The sleuthing skills will also come in handy in weeding out "too good to be true" offers. "When someone files for a Chapter 13 bankruptcy the scam artists come out of the woodwork. They're drawn to people who have filed for bankruptcy like moths to a flame," says credit education specialist Nicole Lowe at TrueCredit.com, a division of TransUnion.

One common scam: In return for an upfront fee, conmen will offer you a credit card or set you up with a home loan. "Make sure you're thinking not hopefully, but rationally," Lowe advises. "If they're seeking you out, be on your guard." Phone offers available only on-the-spot are a red flag.

Seven years after a Chapter 13 discharge, evidence of it will fall off your credit report. But you can get moving much sooner by appearing as less of a risk to lenders:

  • Keep tabs on your credit report. Despite the Fair Credit Reporting Act, which states that only accurate debts can be listed on a credit report, creditors don't always follow through to ensure that debts included in a bankruptcy are labeled "included in BK." The wrong note makes it look like you have not only filed bankruptcy but also continued racking up debt in the process. Make sure you understand everything on the report, and if you discover a mistake, contact the credit bureaus (TransUnion, Experian and Equifax) to remedy the situation.
  • Open a secured credit card. This type of VISA or MasterCard is pre-paid, meaning you must deposit an amount in the issuer's bank first. In return you'll receive a credit line for up to 100 percent of the account balance. Again, it may not be easy to find a bank that will work with you. "Shop around at your local bank and credit unions," Lowe suggests.
  • "Be selective about opening any account, and any account you open or use, make sure that it's paid as agreed and paid on time," says Cate Williams, vice president of financial literacy at Money Management International. Viale suggests acting quickly but cautiously, getting two or three different quotes on, say, a car loan.
  • Learn the tricks of the FICO-score trade. Stephen Snyder, author of "Credit after Bankruptcy," learned the hard way that getting a home equity line of credit hurts your score much more than a home equity loan. Another tip: Be aware that many credit unions don't report credit history to all three credit bureaus. They keep rates low for members by not reporting, Snyder explains.
  • Don't sink all your money into your world of old. A Chapter 13 discharge means extra money in your pocket. Experts advise a responsible return to borrowing to build a new, healthy chapter in your credit history. As a trustee, Hildebrand suggests an afterlife of savings and wise investments.

-- Posted: Sept. 20, 2004
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2004 Debt Guide
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