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You've filed for bankruptcy. Now it's time to start
rebuilding your credit.
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| Bankruptcy timeline |
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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, president of StartFreshToday Inc., an
information resource for bankruptcy lawyers, 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.
"650 or above is when you can shop for a decent
rate," she says.
Also, 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 percent 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."
Debtors are advised 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 percent 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. TrueCredit, a provider of consumer
credit management services, recommends checking to make sure pre-bankruptcy
debts are recorded as "included in BK."
Some experts suggest avoiding credit repair
agencies.
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