While Chapter 7 or Chapter 13 bankruptcy may help you resolve unpaid debts, they may have certain consequences on your credit score. At San Diego Bankruptcy Attorney, our work is to guide San Diego, CA residents through the entire process of filing for bankruptcy. We focus on areas such as wage garnishment, vehicle repossession, debt settlement among others. We prepared this guide to inform you of ways of building credit after filing for bankruptcy.

Understanding the Relationship Between Bankruptcy and Your Credit

Creditors do not expect to see a bankruptcy filing on a credit report. Furthermore, the damage a bankruptcy filing may do on your credit score largely depends on your initial previous credit score. Your credit might reduce a bit if you filed for bankruptcy when you had unpaid debts on many accounts and a high debt-to-asset ratio. “High debt-to-asset ratio" implies that you have lots of debts but few assets.

At San Diego Bankruptcy Attorney, we believe that filing for bankruptcy with a good credit score may significantly lower your score. You should expect a massive drop in your credit rating once you file for bankruptcy. Those who initially had a bad credit score when filing for bankruptcy will only experience a modest decline in their scores. All that matters is how you build the credit after any of these circumstances happen.

Bankruptcy may be a convenient solution if you are falling behind on your debt payments. With your debt load reduced, you may start making credit and loan payments on the right time as a way of rebuilding your credit. A Chapter 7 or Chapter 13 bankruptcy filing will appear on your specific credit report for about ten years. After this period elapses, a credit reporting agency may delete the bankruptcy record from your report.

What is a Credit Reporting Agency?

Credit reporting companies are businesses that maintain historical credit information on consumers and businesses. They usually receive reports from your lenders and other creditors and use this information to prepare a credit report for you. Their primary roles include maintaining credit information, calculating credit scores, providing credit reports and partnering with creditors. Understanding the role of largest CRAs (which include TransUnion, Experian, and Equifax) is your first step to building credit after bankruptcy.

The information that is included in your specific credit report is usually based on your amount of credit, delinquent payments, and monthly payments. Itemized occurrences including bankruptcy, tax debt, utility payments or cell phone payments may also help build your credit. When you fail to make two consecutive debt repayments, your creditor will report the delinquent payments to a CRA. Expect the items included on your report including bankruptcies to remain there for seven to ten years.

Some CRAs partner with financial institutions such as credit unions, banks, and credit card companies for mutually beneficial reasons. The partnerships enable the CRAs to obtain reports of your accounts from these institutions. The financial institutions, on the other hand, rely on the partnerships to offer soft inquiries or credit prequalification approvals and target marketing lists. Lenders and other creditors also work with CRAs to receive customized reports, which help them make a credit decision.

Does Filing for Bankruptcy Restrict You From Getting Credit or Loans?

The opportunities for getting loans or credit after a bankruptcy filing may depend on your needs. If you are a card user, you may be bombarded with various offers, which have incredibly high annual fees, interest rates, and other charges. Credit card companies usually present such offers knowing that you cannot file for bankruptcy again unless a certain period elapses. They are also aware that you cannot have any credit card debt discharged during that time.

Though you may get a car loan immediately after your bankruptcy filing, expect subprime lenders to facilitate the loan. While transacting with the subprime lenders, expect exorbitant interest rates among other unfavorable loan repayment terms. Unlike a car loan, a mortgage may not be acquired immediately after filing for bankruptcy.

Mortgage lenders are the key determinants on whether you qualify for a loan after a bankruptcy filing. Completing a Chapter 13 plan and waiting for two years after filing a Chapter 7 may enable you to be eligible for a mortgage insured by the FHA. Other factors that may affect your qualification for a mortgage include your down payment amount, debt load and income.

The Importance of Building Your Credit After a Bankruptcy Filing

Your credit score represents a number that is based on the data filed by a credit reporting firm. Creditors use it to determine your chances of defaulting on credit payments. Creditors, in this case, may include credit card companies, finance companies, home equity lenders and mortgage lenders. Even after a bankruptcy filing, the higher your credit score, the lesser the chances of defaulting on a debt payment.

The highest credit score is 850 while the lowest is 300. Lenders may consider you a low-risk borrower if your score is above 680 and a high-risk borrower if your score is 620 or lower. Low-risk borrowers have better chances of getting credit or loans with the best rates than the high-risk ones. When you decide to build your credit after bankruptcy, you may increase your chances of getting the best rates on loans or credit.

The Convenient Ways for Building Credit After Bankruptcy

A bankruptcy filing may make you suffer a significant blow on your credit. Your only hope is convincing the creditors that you are a low-risk borrower. The methods you can build credit once you are financially stable are discussed below in detail:

  1. Getting Another Credit Card

Though credit cards can help you rebuild bad credit, you should decide on whether you need new ones. It may be wise to get a new card if you currently do not own any yet. Applying for n new one when one or several cards are already in your possession will not help build your credit.

Approximately 10 percent of your overall credit score comes from the new credit inquiries you make or the new credit you obtain. Furthermore, making many credit inquiries or obtaining new credit may suggest to credit reporting firms that you are desperately in need of credit. Any signs of desperation when acquiring new credit may negatively affect your credit score. You have to keep the credit requests to a minimal.

  1. Getting Secured Credit Cards

Secured credit cards are an excellent alternative for those that cannot qualify for regular unsecured cards. The card allows you to make money deposits with a bank or credit union. Expect it to have a unique credit limit based on the percentage of money deposited, ranging from 50 to 120 percent. Though the card will be expensive to procure you may later convert it into a usual credit card.

A disadvantage of using a secured card is that there are creditors who do not consider the credit history you established while using the card. It would help if you asked the credit card company whether the card reports directly to the country's credit reporting firms (TransUnion, Experian, and Equifax). You may lose the benefit of using a secured (credit) card if the issuer does not report to these agencies.

  1. Acquiring a Credit-building Loan

Credit-building loans are designed to help you build an impressive credit after suffering a huge financial setback. You may acquire them from community banks or credit unions. The lenders will ask you to formally apply for your preferred loan for you to have it deposited on a CD or savings account and withheld as collateral. Though the loan amount may be small (ranging from $500 to about $3,000), you won’t get access to it initially.

While you will be repaying the credit-building loan every month, the lender will be reporting the payments to a relevant credit reporting firm. You only access the amount locked in your savings account after paying off the entire loan. This kind of opportunity is great for you and your lender since you will be seeking funds while the lender will profit from the transaction. The lender may report you to credit reporting companies for missing payments or reclaim the saved amount if you miss making the payments.

  1. Getting a Cosigner or Guarantor

Cosigners or guarantors (who may constitute of your friends or relatives) may help you get a loan or credit card if you cannot access them on your own. The role of the cosigner, in consumer credit transactions, will involve paying credit card charges or a loan if you (the primary debtor) defaults. A guarantor, on the other hand, will pay the credit grantor when you fail to make business credit payments.  To prevent your cosigner from being reported to credit reporting companies, ask the creditor to report the defaulted account in your name.

  1. Buying Items on a Credit Basis from a Merchant that Reports to Credit Reporting Firms

Local merchants that report to credit reporting authorities may help build your credit score. You will be taking items from them on credit and making all of the payments on the right time for their help to be effective. You may agree with the merchant on an appropriate payment plan for purchasing an item. Since the business will report you to a credit reporting company if you miss making any payments, your credit score will negatively be affected.

Ways You Can Use to Build Your Credit After Bankruptcy Without Obtaining New Credit

We believe that various ways can help you build credit after a bankruptcy filing without obtaining new credit. Such methods may include increasing the credit limit on your existing cards, getting credit in your name and using existing credit cards wisely. Others ways involve including positive information on your report of credit and disputing incorrect information included in the report. They are discussed below:

Disputing Incorrect Information Included in a Credit Report

Pursuant to Civil Code 1785.1, credit reporting firms operating in California are required to follow an elaborate credit reporting mechanism. Such a mechanism was developed to help investigate and evaluate the general reputation, credit capacity, credit standing and creditworthiness of consumers like you. The agencies are supposed to exercise their duties with respect for your privacy rights, impartiality, and fairness.

California’s Consumer Credit Reporting Agencies Act prohibits credit reporting companies from inaccurately presenting information in your credit report. You can dispute inaccurate or incomplete credit reporting online, by phone, by mail or by contacting us (San Diego Bankruptcy Attorney). If you want to do it online, visit the CRA's website and locate the "dispute" option from the site. If you prefer doing it by phone, call the CRA that inaccurately presented information on your credit report. Contact details for all CRAs are available on their respective websites.

When disputing the report by mail, you need to compile a list of all inaccurate and incomplete information you want the CRA to remove or correct. You should also draft a letter citing each correction needed and your reasons for disputing that item. The relevant CRA should reinvestigate the disputed inaccuracies or remove them entirely from your report in three business days. Once the CRA corrects these issues, you should expect some improvement in your credit score.

Including Positive Information (Which Indicate Financial Stability) on Your Credit Report

Your goal for asking a CRA to add positive information on your report is to make you appear more creditworthy before creditors. The information usually includes missing positive account histories and information that demonstrates your stability. Remember that a CRA will only add such details if something is incomplete or incorrect in your file. Disputing incomplete or inaccurate information in your file may help you have the positive details added.

Creditors will expect to see evidence showing stability in your credit report. The various types of information showing stability include your current employment, previous employment, and phone number. Others include your former/current residence, social security number, and date of birth.

Using Your Credit Card in a Smart Way

Though credit cards offer convenient means for paying for items you want, the convenience usually comes at a particular price. The costs are reflected in the usage fees and interests. You can save the costs by keeping track of your spending, paying your credit card on time and setting a sensible credit limit. Maximizing your card repayments, using store cards wisely and checking your credit card statement can also help you build credit with the card.

Since you are looking to build your credit a few days or months after filing for bankruptcy, you have to be smart about your credit card usage. Look out for large/unusual charges, duplicate charges, changes in your direct debit amounts and hidden charges. You may also ask your card issuer to set a higher credit limit if your spending habits are great.

Getting Credit in Your Name

Most couples tend to open joint accounts once they are married. While joint accounts help foster financial accountability in marriages, they may be the cause of your bad credit score. When you have your credit history, you have financial protection in case of death of your spouse or a divorce. You will not have to deal with the problems in your spouse's credit score or a joint account.

One way to get credit in your name is by maintaining your credit cards. You will find it easier to sort through your funds in an individual account rather than a joint account. The credit you build with the separate account can help you overcome the setbacks brought by a particular life situation.

Increasing Your Credit Card Limit

Having a bigger credit card limit gives you more purchasing power and a significant improvement on your credit score. While you may enjoy making big purchases with the high credit limit, you should note that your debt level makes up about thirty percent of your overall credit score. You may have this limit increased by requesting your card issuer to do so. Some card issuers may also automatically raise your limit depending on how responsible you are when handling credit.

Making an inquiry for your credit card limit to be increased may affect your credit score in various ways. If you make the request with some unpaid debts under your name, the inquiry will be on your credit report for not more than two years. Paying more towards a security deposit can help you increase your credit limit on your secured credit card. You may have your request denied if your account is still new or your income is too low.

Consult with a Bankruptcy Attorney Near Me

While building your credit after filing for bankruptcy can help improve your creditworthiness, you should proceed as explained in this guide. The San Diego Bankruptcy Attorney Law Firm is willing to take you through ways in which filing for bankruptcy can help have your debts discharged. Our legal services on bankruptcies, foreclosures, debt settlement, and taxes among other issues are personalized for clients across San Diego, CA. Call 619-488-6168 to discuss your options regarding any of our services with one of our competent bankruptcy lawyers.