Credit And Purchasing After Bankruptcy
Whether you own a business in Kentucky or have simply accrued too much personal debt, sometimes bankruptcy is the best option, whether it’s because you overextended, have too many medical bills, are going through a divorce or any of a myriad of other reasons. It is often a chance for a fresh start, a chance to get out from under previous debt and create a new beginning. However, it is not without its challenges.
Credit and Loans after Bankruptcy
One of the biggest issues is credit. Whether trying to buy a car, a home or even get a credit card with a decent rate, many avenues and options may be blocked. When applying for credit, essentially money paid back with interest, the bank looks at several factors: collateral, or property the lender can take and sell in order to recoup their money for a person that is unable to pay back their loan; income to ensure that the person has the ability to make the payments; and credit history to make sure the individual has repaid credit and loans in the past. Bankruptcy has the potential to confuse these issues and makes obtaining credit and loans difficult. However, it is not impossible.
If you have questions or issues involving bankruptcy, call Bunch and Brock, Attorneys at Law. With an office centrally located in Lexington, Bunch and Brock have both the knowledge and the resources to help with your legal needs, with experience in bankruptcy, estate and business law. If you have questions or would like to set up a consultation, contact us online or call us at 859.254.5522.
Types of Bankruptcy
Gaining credit after bankruptcy depends upon a number of variables, including what type of bankruptcy was filed. Different types have different results. Types of bankruptcy include:
- Chapter 7: This is the most common form of bankruptcy, and one of the fastest. Chapter 7 is liquidation – all company property is turned over to a trustee, which is then sold to pay off bills to as many creditors as possible.
- Chapter 11: Chapter 11 is essentially a reorganization. In most cases, the length of time to repay the debt is extended, giving the business owners time to potentially restructure and turn things around.
While personal bankruptcy also most commonly utilizes Chapter 7 and Chapter 11 as well, it adds additional options:
- Chapter 12: Chapter 12 is primarily used for family farmers. To qualify, special criteria must be met, which include income, assets and debts related to farming.
- Chapter 13: This type of bankruptcy is for individuals who need to restructure their debt load. Some creditors will be paid back in full with interest, others in full but without interest, and the remainder will be repaid a percentage of the debt. Chapter 13 is also utilized by individuals who do not qualify for Chapter 7 under the means test.
Building Credit After Bankruptcy
One of the biggest determinants of rebuilding credit after bankruptcy is time. A bankruptcy will stay on record anywhere from seven to 10 years, meaning each time a credit report is run it will show up. Fair Isaac Corporation (FICO) suggests that a bankruptcy may lower a credit score by as much as 240 points. Bankrate, a financial services company with more than four decades of experience, suggests that bankruptcy in many cases improves debt-to-income ratio, so credit essentially starts over. However, because of the risks, credit and loans available will carry high interest rates, so they suggest waiting wait for a few years during which you make timely payments, then apply. Bankrate has several suggestions for improving credit.
Restore your Credit Rating
Closely Watch Your Credit Score
- Get your credit report from the major reporting agencies: Equifax, Experian and TransUnion.
- Scrutinize the report for errors.
- Check for missing or inaccurate information.
- Make sure current residence, employment and personal contact information is accurate
- Open a secured credit card.
- Be prepared to pay application and processing fees; make a deposit.
- Credit line will be 50 to 100 percent of deposit.
- Annual rates, if applicable, will be 15-23 percent.
- Make sure the bank reports the credit limit to the major credit agencies, offers credit increases periodically and doesn’t report the card as secure.
Purchasing a Home and Car
This also depends upon the type of bankruptcy. Bankrate reports, for instance, that a person who files Chapter 7 bankruptcy may be able to get a loan for a vehicle the day after filing. However, there are a few things to expect, including:
- Individuals should educate themselves on mortgages and loans.
- It may take 18-24 months after the bankruptcy is discharged and establishing good credit to secure a mortgage loan.
- Interest rates may be 2-3 points higher than conventional rates; be wary of predatory lenders charging higher rates.
- Loans should allow for refinancing.
It’s Worth It
After a bankruptcy, reestablishing good credit may take time and discipline. However, in the end it will be worth it, and will truly help you establish a fresh start.
For more than 35 years, the attorneys at Bunch and Brock have been serving our community and the entire state of Kentucky with their legal needs. We don’t just serve the community – we are members of it, and we look forward to helping our neighbors when they need us. If you have legal questions or would like to set up an appointment, contact us online or call us at 859.254.5522.