Repairing Credit After Bankruptcy: Avoiding Common Pitfalls

By Charissa Potts, Attorney at Freedom Law, PC

Remember when you were a teenager, and your parents lectured you to avoid that friend who always seemed to get you in trouble?

The same lecture could apply to your financial life. There are things you might want to do as an adult that will put your credit in jeopardy. And it is up to you to know what to look for and what to avoid when it comes to spending, saving and lending money.

When it comes to your credit score, every point counts. Even small changes can have an impact on that all-important score, so you want to watch your financial moves carefully when you’ve had a bankruptcy. If you are trying to repair your credit and rebuild your assets, having a steady or rising credit score is essential.

You must protect your credit score after a bankruptcy. It is going to take a significant hit as a result of filing a Chapter 7 or Chapter 13. That’s the facts. But how you handle this impact in the months and years after your filing determine how quickly you can get back on your feet.

Here are some common threats to your credit and how you can avoid them:

·         Taking on a high-interest car loan. You likely need a vehicle to get to and from work and personal activities. Subprime lenders prey on people who have low credit scores or bad credit. You’ve seen those ads, promising loans for anyone and everyone? Well, don’t believe them. Taking a deal from a subprime lender will harm you financially for years to come. These car-loan interest rates can go as high as 30 percent. They’ll tack on plenty of extras, inflating the loan’s price even further. They’ll add warranties and service contracts you may not need, boosting their bottom line. You will be borrowing more than the car is worth, and that can leave you upside down. The lender benefits. You don’t. It’s better to buy a used car, wait until your credit is higher or use public transportation than take a subprime loan.

·         Failing to pay your student loan. The late fees may be painful. The calls and letters from angry creditors are horrible. But defaulting on a student loan is even worse. Your debt will be sent to a collector. The lender may sue you. You’ll have to pay interest, extra fees and any legal settlements on top of your current payment. Plus, you may lose your deferment or any repayment plans you had in place. Your credit score definitely will drop. If your credit score takes a hit, you’ll pay more for all kinds of loans, long beyond this one. Look for ways to work with your lender or find a loan-rehabilitation agreement. Maybe you can consolidate this loan with others for a lower rate. Do whatever you can to avoid default on student loans.

·         Co-signing on a loan for a friend or family member. This is risky business. As many as three out of four borrowers in this kind of loan defaults, and that means that you’ll be left paying on their debts. If someone needs a co-signer, there is a good chance they have poor credit. Now you’re in their same spot because the loan is due or you cannot make the extra payments. You’ll face extra fees, late charges, repo problems or worse. Your credit score will drop. You’ll have a major negative mark on your credit reports. And, chances are, you’ll ruin the relationship. Remember that old phrase, “Neither a borrower nor a lender be?” Live by that.

·         Considering a land contract. In this situation, you’ll work with the seller of a home or condo to set up a financing deal. You give the seller a down payment and the seller will act as a kind of bank for the two of you. You’ll finance the rest of the purchase price and likely pay interest for the deal. Here’s where the problems can start. If the contract has errors, they’re likely not to fall in your favor. The seller could fail to make payments if they still owe money on the home or land, and that will put your deal in hot water. There are so many ways that this deal could go wrong that it boggles the mind. In most cases, you’re better off waiting until you can buy a home again from a traditional lender just to avoid these headaches and financial heartaches.