The most common question clients have asked me over the years is: how will filing bankruptcy affect my credit?
The short answer is: No one can say for sure, but probably not nearly as much as you think.
People often confuse the issue of how long a bankruptcy stays on your credit report, and the issue of how it takes to get your credit back.
A chapter 7 bankruptcy is removed from your credit report after ten years. A chapter 13 remains for on your credit report for seven years after discharge, which doesn’t happen until you complete all the payments. Since this usually takes 3- 5 years, a chapter 13 usually stays on your credit report for 10-12 years.
However, lots of people establish reasonably good credit again in a much shorter time. I have had many clients accomplish this in just a few years. I am not saying anyone can, but I know from personal experience that it is not uncommon.
Consider this: A bankruptcy hurts your credit score. But after you file your debt is dramatically reduced. Your debt to earnings ratio improves. This is very good for your credit score.
Before you file bankruptcy, you probably have tons of unpaid debts. You might have many delinquencies, or even judgments. These debts are usually discharged when you file, meaning you are no longer obligated to pay them. This is very positive for your credit rating.
What can you do to help restore your credit? When you file bankruptcy you have to list all your debts. You are not allowed leave any out. However, a “debt” is a lender to whom you owe money. It is not a lender you have privileges with.
To put it another way, you do not have to include zero balance credit cards in your bankruptcy. These creditors will not find out about your bankruptcy for a while after you file (usually when it appears on your credit report.) They have the option of cancelling your privileges at that time, but most likely they will not. They know you have very little other debt, and will probably pay their debt on time on time every month.
Of course, the zero balance card has to be with an institution you do not owe any money to. You can’t keep one Bank of America credit card and bankrupt another- because as soon as Bank of America gets the notice of the bankruptcy they will delete all your accounts. But if you have a zero balance card with Capitol One, and no debt with Capitol One, most likely you will be able to use that card (with a limited credit limit) after you file.
You cannot pay any single creditor more than $600 in the three months before you file. You wouldn’t want to anyway, because this would cost too much. But if you have old unused credit cards you might want to activate them before you file. A month after you file start making small monthly charges totaling $20 or $30. Be sure to pay the bills on time every month. In my experience this will definitely help you restore your credit.
You can also try and get new zero balance cards before you file. Capitol One and Credit One are big companies with liberal standards. Store cards, such as Target or Sear’s are usually fairly easy to acquire as well. Applying for the cards hurts your credit a little bit, but it’s probably worth it. If you apply for several cards in the same day each lender probably doesn’t know that you applied for other cards elsewhere. I have had many clients go to the mall on the weekend and apply for several cards at different stores, and it generally has worked fairly well.
Remember: you cannot use the cards before you file the bankruptcy. After you file you should use them a little bit, and pay the bills each and every month on time.
You can also get a secured card after you file. Using this arrangement, you agree to keep money in the lender’s bank. If you do not pay the card charges, the lender can seize the account. There is no risk to the lender, and your payment history will appear on your credit report. Capitol One and other banks provide this option.
It’s also fairly easy to get a car loan, although you may have to pay more in interest because of your credit history.
Note that this article addresses credit card debt, not qualifying for a mortgage. I will create another blog about this at a later time. Generally, bankruptcy filers often do qualify for mortgages. They usually have to wait at least one to four years, depending on the type of loan, the kind of bankruptcy, and their situation.