Repairing Credit After Bankruptcy: Part II

By Charissa Potts, Attorney

Getting your credit back in shape after a bankruptcy is like starting a new workout regime. You probably feel like you’re out of shape. It can feel daunting to get going again. You may feel a little sore at first.

But you’ve got to repair your credit after a bankruptcy. Think of yourself as Rocky, standing at the bottom of those famous stairs. The climb is hard. It takes effort. But the effort is worth it when you’re back at the top.

Think of me as your personal trainer, pushing you to succeed. I’m not going to let you slack! So get ready to work. Here are some ways you can rebuild your credit post Chapter 7 or Chapter 13.

1.       Take an honest look at yourself. That means examining your credit scores through the U.S. government’s free site, AnnualCreditReport.com. You’ll also need to study your FICO score in the months to come. If you see any errors, this is the time to correct them. It may take writing some letters, following up if needed and checking back to see the errors were fixed. Future lending and low interest rates depend on having a clean credit report, so take the time to fix what you can.

2.       Find a “workout buddy” at your local credit union. Credit unions are likely to take the time to work with you post-bankruptcy on setting up a secured loan. With a secured loan, you can borrow against the money you already have in the bank. (This money won’t be accessible for your use while you are paying off this loan, so be prepared.) The credit union will send reports about your positive payment history to the credit bureaus, and this will create a positive picture of you as a potential lender.

3.       Apply for a secured credit card. This is another credit-building tool that you can use post-bankruptcy easily and effectively. A secured credit card relies on money you have in your account; the credit limit is set to that amount you initially deposited. These cards may have an annual fee or higher interest rates. But this is a short-term fix to get your credit in shape. Check with your credit union or a local bank for these secured credit cards – they’re more likely to work with you to get your credit back in shape.

4.       Make a vow to pay off your bills on a regular basis. This is where you need to exert every ounce of discipline, just like following a workout schedule. Pay every bill on time. Keep your credit-card balances low. You need to show potential lenders that you have good credit and you’re a reasonable risk if they decide to lend you money. This may require a budget to ensure you’ve got enough every month to cover your bills.

5.       Protect your identity. Every boxer knows that you’ve got to shield your face and body from potential blows from an opponent. The same goes for your identity. You’ve got to redeem yourself in the eyes of financial institutions, so your identity is of the utmost importance. Don’t sign any loans for friends or family. Use cash when you can. Sign up for credit-watch services. And keep an eye out for strange activity on your various accounts. You want to shape your credit and identity just like you’d shape a muscle group.

Every day is another opportunity to work on your credit just as much as you’d work on your health and wellness. It takes effort, but the rewards are substantial. You need to rebuild your credit after a bankruptcy, and the responsibility rests on you and your post-bankruptcy behavior. 

Bankruptcy to Rebuild Credit

By Charissa Potts, Attorney at Freedom Law, PC

Taking a blow to your financial life – whether it is a medical emergency, outstanding debt that overwhelms you or another reason – may feel like the ceiling is collapsing on you. But bankruptcy may be the right tool for fixing your money problems and setting up a better life over the short term.

Bankruptcy once was something people shunned, thinking of it as a last resort or financial weakness. But with more middle-class bankruptcies, people have come to realize that financial issues don’t need to be hidden away. They can be resolved in a way that is honorable and proactive. Bankruptcy is a way to focus on the future and correct the mistakes of the past.

Everyone qualifies for bankruptcy protection, but your circumstances will determine which Chapter you qualify for.

Chapter 7: This common form of bankruptcy allows individuals to erase most of their debts. You can find relief from troubling bills through Chapter 7, which is available to many regardless of the amount of debt owed. You can be married or single, a homeowner or a renter. Chapter 7 is especially helpful for people who have medical debts, issues with personal loans or credit-card debt or loans with collateral that have a high interest rate. The process can take around 90-120 days, and it will wipe the slate clean quickly.

That said, Chapter 7 stays on your credit history the longest. For the next decade, borrowers will see that you’ve had a Chapter 7 bankruptcy on your record. This can affect the interest rates you’ll receive on loans and credit-card accounts. After bankruptcy you can quickly rebuild your credit if you are diligent within 1-2 years.

Chapter 13: Think of this form of bankruptcy as the ultimate repayment plan. This may be a better alternative for someone with a higher income because you’ll set up a restructuring plan to pay back your debts. It also works well for someone who suffered a temporary job loss and is ready to get back on his or her feet in a timely fashion. This sort of bankruptcy takes around three to five years to complete. Your assets are protected, and you don’t have to worry about having your wages garnished.

A Chapter 13 bankruptcy stays on your record for seven years. You will find you can get your financial life back fairly quickly, and that lots of creditors will be willing to lend you money. But be careful about what offers you select. Patience is key because the court will have some say over your financial life for the time you’re in Chapter 13. You can use a credit card, but make small purchases and pay them off quickly and completely. Once you have completed your Chapter 13 plan, you’ll be in strong financial shape to resume your life, whether it is purchasing a home or taking out a car loan with ease.

Other alternatives: You can try to negotiate with your lenders to see if they’ll work with you and come up with a payment plan that satisfies everyone. Be aware that if your lenders settle for less than the amount owed on a debt, you may be subject to pay income tax on the forgiven portion of the debt. For instance, if you owe a creditor $10,000 and the creditor agrees to take $2,000 to settle the debt, then the creditor is required to issue a 1099-C to you for $8,000 and that is taxable income. Also be aware that many so-called debt consolidation companies can you leave your credit score in far worse condition than when you started.

The best idea is to speak with an attorney that specializes in debt issues. I always give a free consultation and will give you all the alternatives and you can choose the one that works best for you.