- Kamini Fox
Improve Your Credit Score after Bankruptcy
We have always maintained that bankruptcy is not the end but rather a chance at a new beginning. While it might not feel like it as you are going through it, bankruptcy is not designed to be punitive. The laws are written in a way to protect the individual as much as possible. Getting through bankruptcy is not easy, and each type of bankruptcy has its pros and cons.
Chapter 7 Bankruptcy
Chapter 7 is a liquidation bankruptcy, which means that the trustee in your case will be tasked with liquidating your “unexempt” assets to pay off your creditors. An exemption is something you are allowed to keep in the bankruptcy and which your creditors are not allowed to take to satisfy their debt. In New York, you are allowed to select either federal exemptions or New York State exemptions. The one you choose will depend on the types of assets you would like to protect in the bankruptcy. For example, if you have a lot of equity in your primary residence, then you would benefit from taking the New York State exemptions, which allow one individual to exempt up to $170,825 above all liens in their primary residence. There are other exemptions for your personal belongings such as your car, clothes, work-related “tools of the trade”, and general household items, among others.
If you have no “unexempt” assets, then your creditors get zero. If you have assets that can be liquidated in the bankruptcy, then the trustee will sell the assets and pay your creditors according to the priority order established by the Bankruptcy Code. Any remaining unsecured debts will be wiped out or discharged by the bankruptcy.
Chapter 13 Bankruptcy
Chapter 13, called a wage-earners plan, allows people with a regular income to propose a repayment plan to pay off their debt over three to five years. There are several advantages to a chapter 13 bankruptcy, including a greater chance of saving your home from foreclosure by repaying the arrears over five years or seek to obtain a loan modification in the bankruptcy.
Effects on Your Credit
Both chapter 7 and chapter 13 bankruptcies will appear on your credit reports and may remain there for up to 10 years. Having a bankruptcy on your credit report does not mean you cannot get credit before the 10 years. As a matter of fact, within one year after the bankruptcy, you can obtain credit cards and after two years, can obtain a mortgage. In addition, your credit score will increase while you are in the bankruptcy and continue to increase thereafter. The reason is your slate is now clean and you can afford to take on new debt without the burden of the old debt. If you receive a discharge of your unsecured debts through chapter 7, your debt-to-income ratio is going to be improved significantly. Having an improved debt-to-income ratio will improve your credit score within months of receiving the discharge.
With a chapter 13 bankruptcy, your debt-to-income ratio will also improve when your unsecured debt is discharged. The additional benefit of a chapter 13 repayment plan is that if you can meet all of your obligations and make your payments to the trustee on time, your credit report will be marked as “current,” which will positively affect your credit score.
Ways To Improve Your Credit
a. Pay Your Bills On-time in In Full
After your debt has been discharged, you have a chance at a new beginning. Make it a habit to pay your monthly bills in full and on time. When you pay your bills in full and on time, utilities such as electric, gas, and water companies, and other companies like cable or cell phone providers will report to the credit agencies that your accounts are current. Keeping all of your open accounts current will go a long way to improve your credit score, and show new potential creditors that you are now a low-risk customer.
b. Obtain a low-limit credit card
After your bankruptcy, chances are you will receive multiple offers for credit cards to help you rebuild your credit. Look at the details of the offers you receive. Some credit card offers you receive will be for secured cards, which require a deposit to be made upfront. Unsecured cards will be available with a very high-interest rate.
It is important to obtain a credit card and use it wisely. Use the card only to the extent that the balance can be paid off at the end of every month. Part of the bankruptcy process is to take classes that teach financial responsibility. Having a low-limit credit card, you can pay off every month will show that you have learned responsible usage and go a long way to improve your credit score.
c. Car loans
You will be able to obtain a car loan after your bankruptcy. However, like the unsecured credit card, you will be paying a higher interest rate. If you review your finances and decide that you can afford the car payments, take out the loan and make sure you pay your monthly payments in full and on time.
Making your monthly car payments will go a long way to improve your credit score.
The important part of rebuilding your credit after a bankruptcy is to implement the lessons you have learned from the bankruptcy. Do not put yourself in a situation where you are once again becoming overextended. It is important to create a budget for yourself that you will be able to follow. If you follow your budget, your credit score will recover relatively quickly.