Rebuilding Credit After Bankruptcy: How Long Does It Take & How Do I Do It?
Rebuilding credit after bankruptcy is not the uphill battle that it is portrayed as being by the media— but it does require some effort on your part and success rates will vary widely depending not only on your personal resolve but also on your own circumstances, which may or may not be within your control at all. However, for many, filing for bankruptcy is actually the first step on the road to a renewed credit standing rather than the last, particularly if you are one of those whose credit health is in such a state of disrepair that a bankruptcy discharge actually is an improvement of sorts, in that it allows some positive progression to be made rather than a neverending cycle of minimum monthly charge payments, late-payment fees, collection lawsuits, and garnishments.
Bankruptcy will stop the bleeding, and, for some, it may be an absolutely necessary first step to a new credit reality.
Rebuilding Credit After Bankruptcy: The Hard Facts
Rebuilding credit after bankruptcy will take some time. It is untrue that a Chapter 13, for instance, looks better on your credit report than a Chapter 7 bankruptcy. Both have the same effect. A bankruptcy of either sort will remain listed in the “public records” section of your credit report for 10 years from the date of filing, regardless of whether you file a Chapter 7 or a Chapter 13 bankruptcy. Any debt discharged in bankruptcy must be reported as (and only as) “discharged in bankruptcy” after filing. Individual debt-listings will “fall off” of your credit report as they hit their statutes of limitations for collectibility, which is about 6 years in Michigan.
Rebuilding Credit After Bankruptcy: Chapter 7 vs. Chapter 13 Bankruptcy
Despite the above, rebuilding credit after bankruptcy can differ somewhat depending upon wheter your bankruptcy is a Chapter 7 or Chapter 13. There may be individual debts that are reported differently during and after a Chapter 13 bankruptcy than during and after a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, secured debts (home loans, car loans, and other sorts of loans with collateral securing the personal debt obligation) are not automatically discharged unless reaffirmed as they are in a Chapter 7 bankruptcy. One of the primary reasons that people decide to file a Chapter 13 bankruptcy is to save a home from foreclosure, a car from repossession, or some other process of seizing the home or car or other collateral securing a certain debt. In a Chapter 13, you can repay the arrearage owed on the debt secured by the collateral over 3-5 years, stopping the foreclosure or repossession or other seizure completely.
In a Chapter 7 bankruptcy, secured debts are automatically discharged unless something called a reaffirmation agreement is signed by you, your Michigan bankruptcy attorney, and the creditor involved. With some sorts of secured debts, such as home loans, you are protected from seizure of the collateral (i.e., foreclosure in the case of a home loan in Michigan) by Michigan state law. You don’t need to sign a reaffirmation agreement for a mortgage even though your obligation to pay is discharged by the bankruptcy because, so long as you voluntarily keep making your mortgage payments, you are protected from foreclosure under Michigan state law because you are not deficient in your payments.
Thus, in a Chapter 7, if you don’t “reaffirm” a debt, even if you keep making your payments on the loan, the debt will be reported as “discharged in bankruptcy” on your credit reports. A home loan that you keep paying after a Chapter 7 discharge will not result in foreclosure, but those prompt home loan payments will no longer assist you with your credit score or positive credit reporting.
In a Chapter 13 bankruptcy, there is no reaffirmation agreement process. A debt is either paid in full, in part and discharged in balance, and collateral surrendered or not surrendered through the Chapter 13 plan. If a secured debt is not surrendered through a Chapter 13 and is instead kept current or its arrearages cured through the Chapter 13, it will be reported as such to the credit bureaus and will continue, if kept current and paid timely after the Chapter 13, to assist you with your credit.
Rebuilding Credit after Bankruptcy: New Credit After Discharge
Rebuilding credit after bankruptcy as a matter of practical necessity is also not as difficult as you might think. For better or worse, since Congress and the Clinton Administration deregulated much of the restrictions on banks and other lending institutions from doing so in the early 1990s, you will be offered, for example, new credit-cards almost immediately upon discharge of your bankruptcy. Thus, you will have the opportunity to take out new lines of credit, borrow against them, and make timely repayment installments, and otherwise rebuild your credit.
Additionally, you will very likely have no difficulty locating rental housing willing to accommodate you and little difficulty financing a new automobile, which is something that residents of southeastern Michigan and the Detroit metro area in particular cannot live without, given the utter lack of public transportation in the area.
With regard to new credit cards and new auto loans, the terms of the loan or financing are the key point of examination. After a bankruptcy, your interest-rate, required monthly payments, and other terms of the financing in question are very likely to be significantly higher than they would have been prior to the bankruptcy, if you had “good” credit prior to filing (believe it or not, many do!).
It is not realistic in most cases to plan on obtaining a mortgage for the purchase of a home within 3-7 years of filing a bankuptcy, however. As of this writing, the mortgage lending market is extremely tight for even potential borrowers who have not filed a bankruptcy. After a Chapter 7 or Chapter 13 discharge, if you do everything right, you need not necessarily wait 10 years to finance the purchase of a new home, but a new mortgage loan within a minimum of 3 years would not be a likely option.
Rebuilding Credit After Bankruptcy: The FICO Score Up-Side
A credit-related up-side to filing for bankruptcy? Believe it or not, there are. Although people try very, very hard to avoid bankruptcy, fearing the damage to their credit-score, there are some important things to remember about that the credit, or “FICO” score.
First, although the exact mathematics of the score are a trade-secret by the Fair Isaac Corporation that developed it, it is predicated largely on two important factors: (1) available credit and (2) debt-to-income ratio. While a bankruptcy nearly always results in the closing of your currently open credit cards (even if they have zero balances are not thus “debts” that are discharged by the bankruptcy, the card-issuers tend to close them down after you file anyway), thus negating any or most of your “available credit,” the benefit a bankruptcy does to your debt-to-income ratio is significant. Before you filed for bankruptcy, you had X income and X+X+X debt. After bankruptcy, you have just X income. It is not uncommon for your FICO score to jump 30-110 points or so in the 15 months following a bankruptcy discharge, provided that you do work hard at rebuilding credit after bankruptcy and do not default on further debt or take out too many new, high-interest credit-cards and then start missing payments, etc.
Second, FICO: what is it good for? If you are not planning on buying a home or a car in the immediate future, your credit-score is simply an amorphous number floating around your general financial stratosphere that has no meaning or impact on your life until and unless you actually need to borrow some money. People tend to cling to the idea of a “good” credit-score far beyond the point of common-sense at times. What good is a 750+ FICO score if your wages are garnished, your car repossessed, and your family dispossessed of its home? Not much. The credit-score should be considered tightly in context. It is NOT a measurement of your personal or moral worth!
Third, your FICO score may not have been that great prior to the bankruptcy anyway. It’s the hard truth that many potential clients of The Hilla Law Firm need to come to grips with before considering a bankruptcy. If you have been sued, if you have missed mortgage payments, if you have been foreclosed upon, if you have been through a short-sale, your credit-score has already suffered. The more important consideration if this is the case (and it is not the case for everybody, to be sure) is moving forward to a point where the monthly financial bleeding has stopped so that you can truly begin rebuilding your credit after bankruptcy.
Since you won’t be able to file for bankruptcy again for a number of years, you’ll need to be extremely careful accepting new sources of credit so that you don’t fall into the same personal crunch that led you to file bankruptcy in the first place. But, unlike in previous decades, when a bankruptcy discharge really did drop a nuclear bomb in the middle of your financial existence for many years, it is now possible to genuinely view a bankruptcy as a fresh start, if you handle it properly and don’t fall back into old habits.
If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.