Filing bankruptcy hammers your credit score. In addition to all of your credit lines being marked as discharged in bankruptcy, the bankruptcy itself counts against your credit score. Fortunately, your credit begins rebuilding immediately. Unfortunately, you might not be getting all of the “credit” you deserve.
Credit Lines Closed in Bankruptcy
For some people who file bankruptcy, the process ends with every line of credit they have being discharged. At this point, no payments of any kind are made to the creditors, and their financial life starts over. However, many people end up continuing to make payments on certain credit lines. For example, if you have a car loan, and you want to keep your car, you have to keep making payments or it will be repossessed by the lender. (A bankruptcy erases the loan, it does not erase the right to collect the collateral that you secured the loan with.) If the loan was discharged in bankruptcy, the lender will no longer attempt to collect the debt. You have to make payments on your own. In addition, the lender will no longer report any information about your payments (good or bad) to the credit bureaus, so you won’t get any improvement in your credit score.
This is true for any loans that are discharged, but not reaffirmed, in bankruptcy. To build your credit up again, you need to establish a history of good payments with new credit lines that were not discharged.
Rebuilding Credit from Bankruptcy
Since you just filed bankruptcy, your credit is bad. If your credit is bad, getting a loan is going to be difficult. It’s just one of those financial Catch-22s that you have to deal with. Fortunately, there are some options.
First, if you have a loan, like a car loan, that you are due to pay off soon, and you are 100 percent sure that you can make the payments between now and when the loan is paid off, you may want to exclude that loan from your bankruptcy filing. If you plan to keep the car, you have to make the payments anyway, because car loans are secured loans. Even though you filed bankruptcy, they can still repossess the car. So, if you are going to keep the car, and keep making the payments, it may actually be better for you to not have that loan discharged so that you continue to get credit for the on-time payments on your credit reports.
Sometimes, not listing the creditor on your filing is enough. If not, you can reaffirm the loan, which means that you recommit to paying the loan, and agree to all the consequences of failing to do so, even though you filed bankruptcy. A reaffirmed loan is NOT discharged and can be collected, and reported to the credit bureaus. This is why it is important to only do this with loans that you know will be paid off without difficulty. If you’re situation is difficult, don’t worry about your credit score just yet. Get everything in order and then use one of the other techniques to rebuild your credit.
Another surprisingly easy way to get a new line of credit is to buy a new car. You’ll notice that after filing bankruptcy, you will get several letters from local car dealerships offering to lend you money to buy a car. Since you can’t file bankruptcy again for seven years, and the loan will be secured by the car, this is a good risk for a car salesman. However, beware that you will not be getting great terms. The interest rate will be high and the loan amount will be limited. If you do have to have a new car though, this strategy can be useful if you are smart about it. Be sure to buy the cheapest car you can possibly get that works for your situation. Remember, too many payments got you into this mess in the first place.
Secured Credit Cards After Bankruptcy
Another useful tool for rebuilding your credit after a bankruptcy is a secured credit card. One option is the Merrick Bank Secured Visa.
With a secured credit card, you deposit some money with a financial institution. This money is typically in a separate account and cannot be withdrawn while you still have the card. The money in the account acts as collateral for the new card. In all other ways, the credit card is like any another. You can charge things on it, they charge interest if you don’t pay the balance off, and they report your payments, good and bad, to the credit bureaus.
With a new credit line, your bankruptcy starts moving into the past on your report and your good payment history follows you into the future. In just a few years, your credit score can be back over 700, although that bankruptcy listed on your report will still lock you out of the best deals, at least for a while. However, with proper management, your personal finances can be back in shape as quickly as possible.