2 steps to finding credit after bankruptcy

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Dear Bankruptcy Adviser,
I have had really good credit for the past 20 years and recently went through a bankruptcy and am wondering how to “start over.” I did keep my two cars and my house, but they still show up as discharged in a bankruptcy on my credit report and, according to my lender, that will continue for three to six months after the bankruptcy is discharged. How do I explain that to potential creditors?
— Terri

Dear Terri,
As you begin the credit repair process, you will need to explain yourself to potential lenders over and over and over again. Yes, it will get to a point where you just might give up. But you cannot!

Patience is a virtue, but persistence to the point of success is a blessing in credit repair. Remember this quote and repeat it as often as possible. Another important quote to remember came from the great Eleanor Roosevelt who said, “No one can make you feel inferior without your consent.” You may be made to feel like you did something amoral or illegal. You didn’t. And don’t let anyone make you feel that way.

Lenders today are quick to say “no” to anything out of the ordinary. Credit dings, especially ones as big as a bankruptcy, give the lender all the incentive needed to reject you for a loan or financing. You must remember that you can get credit again, but it will take some time. Here’s a two-step process to follow.

Tell your story. Research shows that the vast majority, more than 80 percent, of individuals who file bankruptcy have dealt with an illness, a divorce or a period of unemployment. You need to prepare a 30- to 40-second sound bite, explaining why you filed for bankruptcy. Even the most sympathetic loan officer or underwriter will not want to hear you tell your life story. Be concise, but thorough.

These points cover the plight of a majority of people who file bankruptcy. Don’t hesitate to tell your version:

  • An illness can be something manageable but enough of an inconvenience to result in lost hours at work. Sometimes, I have seen clients’ co-payments for a surgery exceed $20,000. That alone is enough to force someone into bankruptcy. You try to avoid bankruptcy, but some event happens that makes bankruptcy inevitable.
  • Divorce can cause household debt to double. And the initial expenses — an attorney, moving costs, apartment rental and furniture purchase — could reach into the thousands of dollars. This debt lands on your credit cards and no matter how hard you try, you do not have enough income to cover two households and mounting credit card debt.
  • A period of unemployment means that savings diminish or are eliminated and credit becomes your 401(k). Even if you start working again, the debt you accumulated might become too much to pay off. Your other monthly bills will still be there once you start working again but with the new addition of credit card payments. Those new payments can become impossible to manage, no matter how much you try to cut back on expenses.
  • Sometimes people are simply irresponsible with money. Being honest and accepting your mistake might satisfy some lenders. While you may have someone to blame, no one cares. Taking personal responsibility will not guarantee approval, but the loan officer or underwriter will recognize that you may have matured and are worthy of a second chance.

Interview your lenders. You don’t want unnecessary credit inquiries showing up on your credit report after a bankruptcy. You will want to know whether you have the option of a loan after bankruptcy before you even fill out an application.

Lenders will have the following questions for you. Have answers ready:

  • When was your bankruptcy discharged? This is not the filing date, but the date you received the notice of discharge from the court. Have this document readily available for the next 10 years. You also will want to know that your case is closed. In most cases, the case-closed notification follows the discharge notice by a few weeks. This is the day you get to begin rebuilding credit.
  • How have you paid your bills since discharge? Car loans and mortgage loans will be great evidence of post-filing payment history. Even if the payments are not reported on your credit report post-bankruptcy, you should have proof of your monthly payments.
  • Have you re-established any credit since filing? You will want to start small before going for large purchase items. Lenders want to see that you can manage your bills and that the bankruptcy was just a one-time, unavoidable event.
  • What is your post-filing FICO score? You want to know your credit score before the lender does. This will allow for pre-approval (or denial) and will help to avoid a credit report inquiry.
  • Do you have a down payment available? The more money you can give upfront for a car loan, mortgage or apartment rental, the more likely you will be approved.

If you are denied, these should be your questions for the lender:

  • If I am not approved now, what do I have to do to get approved in the future? Asking the underwriter open-ended questions will reveal good information and suggestions. Don’t be angry that you were denied credit; just learn what is needed to get approved.
  • Do you know of any lenders in the area that would work with someone emerging from bankruptcy?

You eventually will get approved for loans, even car loans and mortgages, but your post-filing behavior and effort will produce available options. You will need to be your biggest cheerleader and try not to get too demoralized at the first few rejections. Lenders need customers to survive and you will re-establish credit as long as you recognize it will be a winnable uphill battle.

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