Credit After Bankruptcy
Without a doubt, the most frequently asked question that I hear is, “Will I be able to get credit after bankruptcy?” Not only is the answer absolutely yes, the fact is that it has never been easier or quicker to reestablish credit after filing a bankruptcy. Since I started filing bankruptcy cases in 1986, I have seen the credit restoration period shrink from about 10 years for getting houses, and about five or six years for getting cars nearly 20 years ago, to about two years to get a decent mortgage interest rate on house loans and about a year to a year-and-a-half for cars. While it used to be necessary to get a secured credit card after filing a bankruptcy, this is no longer the case. My clients continue to receive unsolicited, pre-approved credit card applications in the mail after filing their bankruptcy cases.
You may not believe this, but…we almost always get credit after bankruptcy for our clients…
Many people look at me with shock and disbelief when I tell them that the first thing I recommend that they do after filing a bankruptcy is to get a brand new MasterCard or Visa card. The purpose of using the card is rather special and limited. For the most part, I recommend operating on a cash available basis after filing a bankruptcy. What this means is if you have the ability to pay for something, which means “to have the cash available”, then and only then should you purchase it. However, you still need to reestablish credit. If you were to ignore the fact that credit is a major part of American society today and continue to operate on a cash basis, you’d probably never be able to reestablish credit to the point where you would be able to borrow any meaningful sum of money. Which would keep you from ever buying a house or car, since not too many people can pay cash for these things. So, you need to reestablish your credit.
The reason I recommend you obtain a MasterCard or Visa card is because these cards report every month to Experian, Equifax, and Trans Union; the Big Three credit reporting bureaus in this country. If you’ll keep using them, but in small amounts, then your regular on-time payments will be reported. Your on time payment record, more than anything else, will reestablish your credit in a short time. In fact, I have people calling me up on a regular basis telling me that they were able to obtain a good interest rate on a mortgage loan in less than two years after their bankruptcy.
In years past, I recommended that my clients pay their credit cards off every month. This worked well for many years, however, about five or six years ago I started to notice a trend developing where the credit cards were being closed by the credit card companies. Investigating this, I found that payments were always made on time and there was no apparent reason for the credit-card company closing out the cards. I began to experiment with different groups of clients to determine how we could combat this practice. Ultimately, we determined that if the card had even a small balance on it and it was paid on time then the credit card company would never close it out. In fact, if the card only had a balance of a dollar, there was never a problem. Later, I had the opportunity to represent a credit insider in a bankruptcy and she confided in me that the credit card companies do in fact close cards out if they have a zero balance. Cards with zero balances don’t make much money for the credit-card companies, so they get closed.
Many folks are concerned that their credit record will be adversely affected by a bankruptcy filing. Most the time, however, it’s in pretty bad shape by the time they file their bankruptcy. Others walk into my office with perfect payment records, never having missed payment in their entire lives. They often come in to see me the month before they’re going to be late for the first time in their lives. These folks have oftentimes borrowed money on credit cards to pay other credit cards. On paper, they look perfect. However, it’s a house of cards, and I generally see these folks about the time the house is about to come crashing down. In either event, bad credit record, marginal credit record, or a good credit record, the answer I have is the same. It doesn’t take long to reestablish a good credit record.
Many people want to know how long the bankruptcy filing remains on their credit report. The answer is, and always has been, 10 years. However, I quickly point out that the really important thing they need to know is how long the bankruptcy filing will hurt their credit. It is my opinion that, if the bankruptcy is not adversely affecting you, meaning that you can get what you need on credit and that your ability to borrow is restored, then it really doesn’t make much difference whether or not the bankruptcy is being reported on your credit rating.
In fact, in many cases, the filing of a bankruptcy actually improves your credit rating. Because a bankruptcy filing means that all debt you owed prior to the bankruptcy is wiped out, future credit grantors know that they’ll never have to worry about some creditor from your past popping up at some point in time later, suing you and garnishing wages, leaving you with less money to pay the other creditors. For this reason, filing a bankruptcy is actually the first step toward reestablishing good credit, for many people. We help rebuild credit after bankruptcy!