Rebuilding Credit After Bankruptcy Takes Time
By Erica Sandberg
October 5, 2012
My Lawyer told me that I would have good credit after filing for Chapter 7 bankruptcy. But when my husband and I tried to get our interest down on our mortgage, we were turned down. My bank told me to get a credit card to try to build my credit back up. My lawyer doesn’t have any answers for me.
I can think of three scenarios for what went wrong between you and your attorney:
- You were given inaccurate information.
- You were given accurate information, but it wasn’t conveyed in an understandable way.
- You were given accurate information in an understandable way, but you only focused on the positive aspects of bankruptcy and siphoned out the rest.
Since I was not present at the meeting, I really can’t know for sure, but certainly an experienced bankruptcy lawyer would be well aware of how legally discharging debt would affect one’s credit history. Whatever was said or left unsaid, however, I’ll give you the correct information now, as well as what you can do to move forward.
First, don’t be so quick to blame the bankruptcy for your current troubles in obtaining a loan or line of credit. Chances are good that your credit reports were reflecting some serious damage before your attorney even filed your paperwork with the court.
Most likely you fell behind on payments, quite possibly on a substantial amount of debt. If so, your balances increased because the creditors added fees and higher finance charges. This caused you to struggle even more with making complete payments on time, and your credit rating began to descend. If you stopped paying altogether, your creditors would have either sued you or sent the account to collections, both of which would have worsened your rating even further.
So what happens to your credit when you declare bankruptcy after such a string of negative actions? Well, it’s sort of like plopping a spoiled cherry on a rotten cake. Serve it all up to a new lender, and it’s no surprise that the response is, “Thanks, but we’re going to pass.”
That said, there is some truth that bankruptcy can improve your odds of qualifying for a loan or credit card. While the notation will be on your credit reports for 10 years from the date of filing, your debt has been deleted. That means that a new financial institution could perceive you as a better credit risk than when you were saddled with all those obligations. But even zero balances won’t guarantee acceptance. Most lenders like to see that applicants have a history of paying obligations as agreed, and evidence of that bankruptcy proves that you don’t.
Thankfully, there are steps you can take to improve your credit rating. Forget, for the moment, about getting an unsecured credit card. Instead, go for a secured card. These products are ideal for people like you who need to make their distasteful credit history a whole lot more appealing to a lender. To get one, you put a cash deposit down with the bank, and they issue you a credit card that you can use exactly like an unsecured card. The only difference is that, if you fail to pay as promised, the bank can take the money you put down as security.
Check out the deals here, and apply for the card that makes the most sense for you. When you have it, charge smartly by paying on time and never keeping a running balance. Do that and you’ll gradually pull your scores up. Give it a year, and check your reports and credit scores again. When they are much more attractive, go ahead and contact your mortgage lender. With a rebuilt rating, no debt and a healthy income, chances are better that they’ll say, “Thanks for asking — we’d love to offer you a better rate!”
Got a question for Erica? Send her an email.