When to Expect a Credit Rebound After Bankruptcy
August 9th, 2018 by Bunch & Brock
Filing for bankruptcy protection can help you get out from under a mountain of unmanageable debt and start over with a clean slate. While discharging debt can be a positive step overall, it will certainly impact your credit score and affect the interest rates you are charged for future credit. The good news is, bankruptcy credit penalties are temporary, and your score may rebound sooner than you think.
How Low Can it Go?
Depending upon your credit numbers before you declare bankruptcy, your score may initially drop by 130 to 200 points. So if you had a high score, over 720, you may face a new ranking in the low 500’s. But, many people who file for bankruptcy have already inflicted damage to credit with late and missed payments. In that case, your score may rise immediately after your debt is discharged.
When Your Score May Increase
Research shows that credit scores often rise within the first year after filing for Chapter 7 bankruptcy. Analyzing 2010 Equifax data, The Federal Reserve Bank of Philadelphia found that while Chapter 7 filers had an average 538.2 (“poor”) credit score, this went up to 620.3 (“fair”) about six months after filing, when the court case (and debt) was discharged. Chapter 13 filers must wait longer to see improvement, since they repay their debts under a 3-5 year repayment plan.
Life After Bankruptcy
A Chapter 13 bankruptcy stays on your record for 7 years and a Chapter 7 bankruptcy lingers for 10 years. However, this does not mean you are excluded from getting any type of credit for 7 or 10 years. In fact, you are eligible to obtain a home loan four years after discharge of Chapter 7 and two years after filing Chapter 13.
Of course, many banks will reject you for any type of loan for a while, and those that do offer credit will not provide favorable terms. You may be surprised to find yourself awash in new credit card offers after bankruptcy. Why? Creditors realize a bankruptcy means you won’t have many other debts to pay and that you may be motivated to re-establish good credit. They offer very limited credit lines, such as $1,000, and make money by charging high interest rates and fees.
Car dealers are also happy to offer high-interest financing to people with “poor credit” (and happy to repossess the car if you don’t make payments). If you are wise, you will avoid taking on a 7-year car loan with subpar interest rates, since you are likely to end up owing more than the vehicle is worth.
Rebound and Rebuild
After bankruptcy, it is important to examine your lifestyle and make necessary changes, perhaps adding new sources of income, forgoing luxuries, or both. To improve your credit after bankruptcy, you can also:
Open one credit account — You might take advantage of a credit card offer, with plans to pay the entire balance off each month to avoid accruing interest. You can also look into a secured loan or credit card, which involves borrowing against money you deposit up front. In either case, the goal is to keep balances low and make payments on time and in full.
Ask a family member or close friend to help – Someone loyal and creditworthy can co-sign for your new credit card or loan. Alternatively, you could be added as an “authorized user” on their card. You must be fully prepared to make your payments reliably, since this person will be financially responsible for the balance. Make sure your payment history as an authorized user is reportable to credit bureaus.
Before Filing for Bankruptcy
It is best to speak to an attorney before making the decision to file for bankruptcy. At Bunch & Brock, we can advise you on the right course of action, and if bankruptcy is the answer, handle your case to ensure your best outcome.