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There has been a steady stream of bankruptcy filings during the economic downturn, and we can realistically expect 2011 to be no different. Look for another 1.5 million people to file for bankruptcy in 2011.
Since the mortgage crisis began in 2007, the number of people filing for bankruptcy protection has started to approach the total number before bankruptcy laws changed in 2005.
If you are contemplating bankruptcy, you can also plan for life after bankruptcy even before you even decide to file. That is not to say you ought to plan a bankruptcy filing, but you can plan to have good credit again in the event you do file.
Here are 10 things to think about when you’re considering bankruptcy.
Create your story
Close to 90 percent of bankruptcies occur for one of three reasons: illness, divorce or loss of employment. When a bankruptcy does occur, future employers and lenders will want to know why you had to file. You want to have a clear and concise explanation of the reason you filed. Don’t show shame or remorse. Just accept that this difficult event has occurred, take responsibility and take steps to recover.
Review your credit score after filing
As a client once said after filing, “my score can only go up.” You once had a good credit score and you will have a good score again. Just take that current credit score number and put it somewhere as a reminder of where you once were — and where you are not going to be again.
Review your credit report
You will want to clean up items on your credit report that legally can be removed or revised. Correcting personal information is the first way to show potential employers and future lenders that you are taking life after bankruptcy seriously. Information like previous addresses and employment information must be accurate and current.
Show creditors “discharged in bankruptcy”
This is the first and essential step toward recovery. You do not want any post-filing, negative history showing up on your credit report. For example, you might have voluntarily turned in a car as part of your bankruptcy. You must make sure that the creditor does not show continuous late payments after the vehicle has been surrendered.
Know when debts can be removed
Each debt is a negative item on your credit report that can be removed eventually. You need to know when that date will arrive. Each type of account has a length of time it will be on your credit report. It might only be for a few years. For example, a credit card or personal loan account will stay on your report for seven years from the date of last payment or last use of that account.
But you want to set up dates on a calendar to know exactly when a negative mark is ready to be wiped off your record. That’s when the positive marks start to stand out and start to help your credit score. The further you get from the original date of the negative mark, the less impact it has on your credit score.
Begin to interview lenders
You will want to call three lenders — a car lender, a personal loan lender or a credit card lender. You will want to know the credit guidelines required to qualify for a loan or credit with them. You do not want to apply for credit yet, but you do want to know whether that particular lender is one that you can or cannot contact when the time comes.
You should ask:
Can I be approved for credit even though I filed bankruptcy?
How long after I file can I be approved?
What is your minimum credit score requirement?
Do you review all three credit bureaus or just one particular bureau?
Can I be approved for credit without a co-signer?
Do you know of any other reputable creditors that work with people who just filed bankruptcy?
Apply for a secured credit card
This is one great way to re-establish a post-bankruptcy filing credit line. You will give the bank or credit union some money, usually $500. In exchange, you will get a credit card with a matching credit limit. Make sure the lender reports this new credit line to all three credit bureaus.
You want all three bureaus to show post-bankruptcy payment history. You don’t want to get a secured credit card, have it report to only one major agency and then be denied for credit because a particular lender does not look at that particular credit bureau report.
You need all three bureau’s credit scores to improve after bankruptcy. Many lenders look at a “blended” score of all three bureaus. One bad credit score can bring down two better scores and disqualify you for a loan.
Also, find out when you will be able to increase the card’s credit line and when you can receive an unsecured credit card. Try to choose a lender who will work with you to improve your credit.
Apply for an unsecured credit card
Some lenders will give you low, unsecured credit limits immediately after you have filed for bankruptcy. You can use these low-limit credit cards to re-establish credit. Just as with a secured credit card, make sure the lender reports that new credit line to all three credit bureaus and find out when you are able to increase the credit line.
Focus on banks and credit unions
Avoid finance companies and rent-to-own lenders. Instead, stick with banks and credit unions. Your credit score and credit reputation will be stronger if you can re-establish with the larger institutions.
Remain positive through bankruptcy
Eleanor Roosevelt once said, “No one can make you feel inferior without your consent.” You will be denied credit as you start your recovery from bankruptcy. But you must remain positive. Don’t let a few rejections keep you from the ultimate goal of re-established credit.
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