My experience has been that you will recover and start rebuilding your credit more quickly after Chapter 7 more quickly than you will a Chapter 13. This is true because your Chapter 7 case will be over in 3 to 4 months, after which you can start to rebuild your credit. Our experience at Ginsberg Law Offices has been that you will begin to see a noticeable improvement in your credit score about 8 months to a year after the date of your Chapter 7 discharge. Credit reporting agencies (i.e., Equifax, Trans Union and Experian) are private companies, and each uses a proprietary algorithm (mathematical formula) to calculate your credit score.
The exact factors that the credit reporting agencies are trade secrets, but we do know that the credit bureaus base their credit scoring on formulas developed by the Fair Isaac Company. Fair Isaac publishes a consumer site called myFico.com that identifies the following five factors which impact your credit score:
- payment history – 35% – the more accounts that are paid on time the better
- amounts owed – 30% – the less you owe the better
- length of credit history – 15% – the longer your credit history the better
- new credit – 10% – new credit accounts work against your score
- types of credit used – 10% – there should be a balance between big ticket items like a mortgage and vehicle and signature loans like credit cards
If you look at the myFico.com site, you will see that not a lot of specifics are revealed but the information given is useful nonetheless.
After your case is discharged, I will discuss with you one or more strategies whereby you can rebuild your credit after Chapter 7 bankruptcy. Often a part of this strategy is to use the provision of the Fair Credit Reporting Act to challenge inaccurate and outdated credit report information so that derogatory entries will be removed.
Clients who have followed my advice about restoring their credit after Chapter 7 report to me that their credit scores usually take about a year to rebound to 600+ and that it may take 8 months to a year until they would qualify for a reasonable car or mortgage loan rate.
Steps You Can Take to Restore Your Credit Faster than Average
While you do not have complete control over your post-bankruptcy credit bounce-back, there are steps you can take to speed up the process:
- confirm that your post discharge credit report is accurate. Debts that were included in your filing should show zero balances. If not, the rebound of your credit score will be delayed. You might also have a claim for damages against the lender for improper reporting.
- apply for small lines of credit with local merchants or your credit union
- research secured credit card offers at bankrate.com. Look for a secured cards that turn into unsecured credit accounts after a certain period of time
- as you obtain new accounts, take advantage of autopay options. Most credit card companies allow you to set up an automatic withdrawal from your checking account to cover the minimum payment. This will insure that you will not be late.
- if you can find a co-signer to help you restore your credit, apply for accounts with your co-signer
- try to maintain stability in your employment and your address
- submit no more than one or two credit applications per month. Excessive applications for new credit after bankruptcy will cause your credit score to drop
- remain patient and do not take turn-downs personally. Most credit decisions are made by computers, not humans
- check your credit report at least twice a year. Georgia law allows you to obtain free copies of your credit reports from each credit bureau twice a year. You will have to pay around $20 apiece for the credit score option.
The United States economy is built on the availability of credit. As we slowly emerge from the Great Recession of 2008 and 2009, lenders are looking for new customers. As a discharged bankruptcy debtor you are an attractive potential client because post-bankruptcy you likely have little or no debt and you cannot file another bankruptcy for at least 8 years.
What Should Your Credit Report Look Like After Bankruptcy?
Once your bankruptcy is over and you receive your order of discharge, your credit score and credit profile will begin to recover. Our experience has been that within 6 months to 1 year after discharge many of our clients are able to qualify for mortgages, car loans and credit cards. There are several reasons why your credit will rebound quickly after bankruptcy:
- you are a much better credit risk after bankruptcy than before – after you get your discharge you are not eligible for another bankruptcy discharge for up to 8 years, and post-bankruptcy you are mostly debt free.
- your debt to income ratio (a component of your credit score) should be greatly improved
- so many people file and have filed bankruptcy that lenders no longer see Chapter 7 or Chapter 13 as a reason to deny credit
We do advise our clients to take an active role in restoring their credit. This starts with downloading and carefully reviewing a 3 of your credit reports for errors. By far, the biggest error we see involves cases where discharged debt continues to show as owing on your credit report. If your debt was discharged, the debtor can report that it was “included in bankruptcy” but the outstanding balance should be zero. If you see a balance due showing, you may have a claim for damages under the Fair Debt Collection Practices Act or in bankruptcy court as a violation of the discharge stay. We have recovered money damages for clients because of improperly reported debts on credit reports.
Another issue we see has to do with secured debts that are not reaffirmed vs. ones that are reaffirmed. If you do not reaffirm a secured debt (such as to a mortgage lender or a car lender), you may be able to keep your house or car and continue to pay, but all those payments you make will not show up as positive payments to restore your credit. Your bankruptcy discharge cancels your personal liability for a debt even if the lender retains a security interest against the property.
If you have any questions about recovering from bankruptcy, please call or email – we’d be happy to discuss with you.