The Following Blog Post is from Associated Content and sponsored by Miami Bankruptcy Lawyers
Despite popular myth, bankruptcy is not the credit destroyer that most people assume. In reality, by the time an individual files bankruptcy, his credit is already about as bad as it can get. Bankruptcy can actually improve a credit score because it signals an end to old destructive habits and hyper-extended resources. It provides a fresh start. Although it is true that a Chapter 7 bankruptcy filing will stay on a credit file for ten years, it becomes much less important to the calculation of a credit score as the months pass. Most people can achieve a good credit score (at least 700 points) in as little as two years after emerging from bankruptcy, if they follow some basic guidelines. You can take this advice to the bank — literally. As a bankruptcy lawyer, I've seen it work many times.
Pay your remaining bills on time.
Of course, this should be common sense, but some people just don't get the message. Not all debts will be wiped out by a bankruptcy filing. Mortgages and car loans still need to be paid. Student loans continue. There are other debts that might have survived. All of these accounts will continue to appear in your credit file. Therefore, it is imperative that they be paid in a timely manner.
Accept offers of credit.
Starting at about six months after your bankruptcy is discharged (concluded), you'll be in a position to start opening up credit accounts. You won't have to look for the creditors, however. They'll start soliciting your business. My clients usually receive letters from car dealerships first. These letters, referencing the bankruptcy, tout attractive offers on new and used cars to “help you get back on your feet”. Will you get a 0 down 0% deal? Probably not, but the interest rates are often much better than the consumers would have received before filing bankruptcy.
About this time, banks will start offering credit cards, too. Many of these offers are for relatively low credit lines in the $500 to $1,000 range, and interest rates that won't make the newspaper headlines, but they're a start. Use them wisely. Make a few purchases each month. Don't go over your credit limit, and pay the bill on time. In fact, although this may seem counter-intuitive, it may benefit you to pay less than the full balance. Some financial experts suggest that, when you're in a rebuilding cycle, pay off your credit card one month, but leave a balance on it the next. That way, the bank gets some benefit in the form of interest. Banks like that. When you show the bank how trustworthy and creditworthy you are, just watch your credit limit rise.
Why are creditors so anxious to lend after bankruptcies are discharged? Because the bankruptcy process has eliminated a lot of debt, freed up income, and the consumer is prevented from filing bankruptcy again for years.
Review your credit reports.
Studies have shown that as many as 80% of credit files contain serious mistakes. That's 4 in 5 credit reports – an astounding number. Credit report errors almost always work against the consumer. Errors include merging of two or more files on people with similar names, duplicate reporting of the same account by original creditors and collection agencies, and outdated information. Imagine how much more difficult it is for people with “bumps and bruises” on their credit. People who have been in a downward financial spiral often don't even realize what is correct and what is erroneous.
About six months after discharge, I always advise my clients to obtain copies of their credit reports. A review of reports from all three major credit bureaus, Trans Union, Experian and Equifax, should show the bankruptcy filing and discharge. Be warned, however, that bankruptcy doesn't erase a bad credit history. Unless the information is in error, accounts that were listed in a credit file will remain on a report for seven years from the date of delinquency. The reports should show, however, the effect of the bankruptcy on each account. Most will have a notation “Included in Bankruptcy”.
Some debts that were included in bankruptcy may not have been reported that way. For a bankruptcy filer, incorrect credit information will negatively affect credit scores because the scoring system will assume that the accounts are still active, unpaid. and not discharged by the bankruptcy. There are two routes to correct this. One is to contact the creditor directly. Often the creditor will show in its own records that the account is discharged, but will not have reported it that way. The other route is to take advantage of the dispute process offered by the major credit bureaus. This process is outlined on the websites of the big three bureaus and the Federal Trade Commission.
Secured credit cards? . . . maybe.
Many of my clients ask about secured credit cards after bankruptcy. I usually caution them to wait until they can qualify for traditional credit cards. Some people just don't want to wait or have an immediate legitimate need for a credit card for travel or business purposes.
I don't like to recommend secured cards as a way to re-establish credit because of their cost. First, the bank will require that the applicant open a savings account and deposit several hundred dollars, which will serve as collateral. Many of these cards, which are often marketed to people with bad credit, also have high interest rates, high annual fees and high “set-up” fees that are tacked onto the account. These fees often use up half of the initial credit limit. With most of these accounts, however, once the consumer has established a track record of on-time payments, the bank will allow the account to be converted to an unsecured status.
Finally, a little patience and a little sense will go a long way toward re-establishing not only good credit, but good credit practices that will prevent the necessity of filing bankruptcy in the future.
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