How to rebuild credit after bankruptcy
If you file a Chapter 7 bankruptcy, you will begin to reestablish your credit sooner than you probably think.
Most debt relief companies and message boards give off the impression that bankruptcy will ruin you, credit-wise, for up to 10 years.
While it is true that a Chapter 7 bankruptcy is generally scheduled to remain on your credit report for that long, most consumers who file Chapter 7 generally begin to reestablish their credit within about 2 years of filing.
You see, when you file a Chapter 7, you won't be able to file another Chapter 7 and successfully discharge your debts for 8 years from your previous filing date. So you become one of the least risky consumers a banking institution can lend to.
Establishing your credit after bankruptcy
Typically, reestablishing your credit after Chapter 7 bankruptcy will be similar to how it was when you were 18
It is advisable to obtain 3 secured credit cards immediately after you discharge from your bankruptcy. This way you will accelerate your rehabilitation.
Chapter 7 bankruptcies normally discharge about 90 days after filing.
You will generally qualify for a secured credit card within a matter of months of discharging.
You will generally qualify for unsecured credit cards within 24 months of discharging.
Generally speaking, after you have acquired an unsecured credit card, they will gradually increase your credit limits after making 6-12 months worth of on-time payments.
Credit cards after bankruptcy
Beverly Harzog, a credit card expert, author, and consumer advocate has conducted an extensive amount of research pertaining to credit cards after bankruptcy. She has compiled a great list of secured credit cards that will help you rebuild your credit more quickly after bankruptcy.
You can view her extensive list of cards and benefits here.
Car loans after bankruptcy
Your ability to acquire a car loan after bankruptcy has a lot to do with your car payment history. If you have paid your car payments on-time, you will have more favorable auto financing options available to you.
Edmonds.com has a great article about auto financing after bankruptcy. To read it click here.
Buying or refinancing a home after Chapter 7 bankruptcy
Per Hud.gov: A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. During this time, the borrower must have
- Re-established good credit, or
- Chosen not to incur new credit obligations
An elapsed period of less than two years, but not less than 12 months, may be acceptable for an FHA-insured mortgage, if the borrower
- Can show that the bankruptcy was caused by extenuating circumstances beyond his/her control, and
- Has since exhibited a documented ability to manage his/her financial affairs in a responsible manner
Note: The lender must document that the borrower’s current situation indicates that the events which led to the bankruptcy are not likely to recur.
Source: U.S. Department Of Housing and Urban Development 2019 FHA Handbook - Page 257
Buying or refinancing a home after filing Chapter 13 bankruptcy
Qualifying for a FHA mortgage when filing a Chapter 13 bankruptcy works a little differently. It is possible to purchase or refinance a home while still in a Chapter 13 bankruptcy.
Per Hud.gov: A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage, provided that the lender documents that:
- One year of the pay-out period under the bankruptcy has elapsed
- The borrower’s payment performance has been satisfactory and all required
payments have been made on time, and
- The borrower has received written permission from their bankruptcy court to enter into the mortgage transaction
Source: U.S. Department Of Housing and Urban Development 2019 FHA Handbook - Page 258
FHA mortgages generally require a 3.5% down payment. The interest rates are comparable to a conventional mortgage, they're generally about a 1/2 percent higher.
The caveat with a FHA mortgage is you will need to pay PMI (Principle Mortgage Insurance) for the duration of your loan. Whereas with a conventional mortgage, you will no longer have to carry the PMI once you've paid your balance below 80% of your home's value.
Although, you may be able to refinance into a conventional mortgage when your mortgage balance falls below 80% of your home's value. By doing so, you would escape the PMI requirement.
In respect to bankruptcy vs. debt settlement
It's a personal choice that only you can make. However, if you can't settle your debts quickly, I generally recommend Chapter 7 bankruptcy versus a long-term debt settlement approach (longer than 24 months).
If you wish to weigh your options, you may want to review my chart that compares debt settlement vs bankruptcy.
For more information about reestablishing your credit after filing bankruptcy, I encourage you to go to getoutofdebt.org. Steve Rhode is a consumer advocate who covers the debt relief industry and he has a great article on credit after bankruptcy.
For additional information about debt settlement, please refer to my 4-part series about how debt settlement works.
I hope this information about credit after bankruptcy helps you. Please feel free to contact me with any questions.