Bankruptcy timeline: Rebuilding credit

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You've filed for bankruptcy. Now it's time to start rebuilding your credit.

It will be hard to get credit at the start, but it won't be impossible. The bankruptcy on your record means you will have to pay more to borrow money, since you'll probably be considered a subprime borrower. Subprime borrowers pay higher interest rates and penalties for defaults because they are considered a greater risk.

Kevin Chern, a bankruptcy attorney in Chicago, says that when a person files Chapter 7 liquidation bankruptcy, the debtor immediately and dramatically reduces his or her debt-to-income ratio.

"You also eliminate your ability to qualify for Chapter 7 for another eight years. In the eyes of a potential lender, you may actually appear to be a better risk immediately."

He says that most Chapter 13 petitioners also will see a reduction in debt-to-income ratio, but this won't occur as quickly.

"After three to five years of living on a strict budget, Chapter 13 debtors should be much more equipped to manage their money efficiently. In many cases, after 18 months of regular Chapter 13 payments, a debtor can refinance out of a Chapter 13, especially if the debtor has any equity in a home."

Bankruptcy experts advise consumers to try not to borrow money too quickly. Instead, they should make timely payments every month to help re-establish their credit and get loans on more favorable terms.

Jessica Cecere, president of the Consumer Credit Counseling Service of Palm Beach County/Treasure Coast of Florida, suggests waiting until your credit score has increased.

Cecere says a "650 or above is when you can shop for a decent rate."

Don't know your credit score? You can check it for free at myBankrate.

Another smart move: Keep an emergency reserve.

"Bankrupt consumers are in a better position to save because they've eliminated their debt and they need to plan for their financial future again," says Cecere. "I always say, save 10% of your income, and the minimum is whatever you can manage. Save pennies or change if you have no room in your budget and you are paying off debt."

Be sure to watch out for predatory-lending scams and payday loans. Predatory lenders seek credit-impaired consumers and charge them exorbitant fees for borrowing money. Payday loans let consumers postdate a check for the amount of the loan and the fees for taking out the loan. Those fees are the killer. Credit counselors say you could end up paying as much as 400% interest with a payday loan.

Restoring your credit rating

Bankrupt consumers should keep a close eye on their credit reports and credit scores. The consumers should get a copy of their reports from all of the major credit reporting institutions: Equifax, Experian and TransUnion. The reports should be examined for errors, missing and/or inaccurate information regarding current residence, employment and personal contact information.

Some experts suggest avoiding credit repair agencies.

"There are many unscrupulous agencies out there that will claim they can remove a bankruptcy or fix a credit report," says Samah Haggag, a senior marketing manager for Experian. "There is nothing a credit repair organization can do that you cannot do yourself."

So how much will a bankruptcy hurt your credit score? Fair Isaac Corp., or FICO, a company that produces one of the leading credit scores lenders use, offers two scenarios on its website that show how credit missteps (including bankruptcy) can affect scores. In these two scenarios, a bankruptcy filing can lower a credit score by as much as 240 points.

Experts say that after bankruptcy the degree of improvement in a score will vary. Credit expert Barry Paperno explains that this will depend on "what the consumer's score was prior to the bankruptcy filing, as well as to what degree the bankruptcy affected the consumer's score, how much new debt has been established and the time elapsed since the bankruptcy discharge."

A bankruptcy can remain on your credit report -- and thus impact your credit score -- for up to 10 years.

Credit cards

One way to start improving your credit is to open a secured credit card account right after you are discharged from a bankruptcy. Simply head to a bank, fill out an application and make a deposit into a secured account. The bank, in turn, provides a credit card with a credit line that's 50% to 100% of the deposit. The Federal Trade Commission says that the bank will usually pay interest on your deposit.


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