One of the major financial implications of filing for personal bankruptcy is the negative impact on the debtor's credit score. Significant credit score reductions impact the ability to obtain unsecured credit (like credit cards) and also results in higher interest rates charged on collateralized financing like car loans. Moreover, a personal bankruptcy generally means that the debtor is not eligible for a conventional home loan for at least two years.
Despite these negatives, a personal bankruptcy is often the best choice since it provides debtors with:
- Immediate relief from debt collection harassment
- Protection from lawsuits and garnishments
- Putting a pause on evictions and foreclosures
- Lower long-terms costs over private debt reorganization and refinancing
- Shorter debt relief time lines -- generally, bankruptcies are finished in several months; private debt reorganization may take years to complete
- Emotional and stress relief
- And more
Just as important, damage to a debtor's credit score is not permanent. Most debtors can regain a reasonable credit score within two or three years after their bankruptcy is finalized. Experienced debt relief and consumer rights attorneys can help determine what are the best options and can help with credit repair. Here are some tips on how to begin repairing your credit scores post-discharge.
Monitor Your Credit Scores
To increase your credit score, you need to know what your scores are and how to increase them. Thus, it is important to get access to your scores. There are three national reporting agencies – Equifax, Experian, and TransUnion. In general, you should monitor all three. Checking your own credit scores does not impact your score. Each national service provides a free copy of a person's credit report once a year. However, it is recommended that a debtor "pull" their credit reports more often than once a year even if there is a small cost. Every three-to-six months is reasonable for a debtor after a bankruptcy is finalized.
Pay On Time and Make Extra Payments
After a discharge, the goal is to show lenders and credit card companies that the debtor is becoming less of a credit risk as the bankruptcy recedes in time. Generally, being a high credit risk results in credit being denied and/or in higher interest rates being charged. Your bankruptcy will be listed on your credit reports for seven to 10 years. Because of that, lenders and credit card companies will pay close attention to the debtor's payment history post-discharge. Thus, the most important step in demonstrating that you are becoming less of a credit risk is to pay ALL bills on time post-discharge.
Prompt and timely payments will demonstrate two important facts:
- The debtor's commitment to repairing his/her credit and
- The debtor's financial ability to accept and manage debt payments
Making extra payments on any existing debt is another strategy that will help repair credit. "Extra payments" does not mean paying extra on a scheduled payment. Rather, what is helpful is a separate payment -- say on the 20th of the month. A small extra payment, like $20, is sufficient to get a boost in your credit scores. Many people pay their bills online and, sometimes, it is easy to schedule an extra "one-time-payment."
Obtain a Credit Card and Avoid "Maxing Out" Your Balance
Another important strategy is to obtain a credit card post-discharge and to avoid “maxing it out.” Shortly after a discharge, many debtors are eligible for a new credit card. Usually, the card will have a very small available balance and will have a high annual fee. In repairing one’s credit score, it is useful to obtain one of these credit cards if possible. Some debtors may find it easier to obtain a credit card from a national retail chain or from a gasoline retailer. Whatever card can be obtained, as noted, it is important to make prompt and timely payments (and extra payments, if possible).
It is equally important not to "max out" the new credit card. Having "unused" credit balances increases your credit score. Having access to unused credit is an indicator that a person is a good credit risk. In general, the more unused credit, the better for one's credit score.
With these and other strategies, a reasonably good credit score can be achieved within a couple of years after a bankruptcy is finalized. Remember, lenders and creditors WANT to make loans. Give them reasons to see that you are now a good credit risk.
Contact an Experienced Debt Relief and Debtor Rights Attorney
For more information, contact the Debtor's Rights attorneys at Guardian Litigation Group. We have the tools and experience you need. Our Mission is to provide unparalleled legal services and support to financially distressed individuals. We can be reached via our contact page or by phone.