“Rebuilding Your Credit After Bankruptcy in 6 Steps” is a series of posts that will appear over the course of the next couple of weeks. Following these 6 steps will help you lay the foundation to achieve better credit. Here are the six steps:
Step #1: Review Your Credit Reports
Step #2: Get a Secured Credit Card
Step #3: Get an Unsecured Credit Card
Step #4: Pay Your Monthly Bills, On Time and Every Month
Step #5: When Appropriate, Get and Pay a Mortgage Payment or Car Loan
Step #6: After Seven (7) Years Ask the Credit Bureaus to Remove the Bankruptcy Off of Your Credit Report
By following the first four steps of this six step plan you are well on your way to reestablishing your credit. After your credit score has inched ever closer to the 700 mark you can go and make a larger purchase like an automobile or house. Don’t purchase these items simply for the sake of getting them but if you need a newer (notice I said “newer” not “new,” big difference) automobile you can do this with your newly established credit. Like your other bills, you have to pay this each and every month. It’s also important that you purchase something within your means. Look over your budget and make sure that you can afford this new vehicle or house. We don’t want to ruin your credit after you’ve worked this hard to rebuild it by failing to make the necessary payments.
Making these monthly payments on a big-ticket item like a house or car is going to show the credit reporting agencies and those checking your credit that you have taken the steps necessary to rebuild your credit. They will view you as someone who is worthy of lending to. By this point in time your credit is going to be as strong, if not stronger, than your other friends and family.
I’m sure you never thought this would be the case but this is the easiest step of them all. If you’ve followed the three steps before this you should have cleaned up your credit report, spent a year laying the foundation for your new credit with a secured credit card and now you should have obtained a reasonable unsecured credit card.
After you’ve spent time laying the foundation for your new credit by using a secured credit card you will want to begin looking for an unsecured credit card. An unsecured credit card is a card where you do not put up collateral (cash, automobiles, etc.) as an assurance that you will pay. We typically recommend that you use a secured credit card for at least one year before moving on to an unsecured card.
After your credit report is accurate you are ready to look for a secured credit card. A secured credit card is a credit card where a balance of money has already been posted. For example, most secured credit cards will require you to put up anywhere between $300 and $500. After doing this, you have a credit limit of the amount that you put up. I know, its not what you are used to in your pre-bankruptcy days but that’s okay. We are in a rebuilding period now.
After filing a Chapter 7 bankruptcy and after your creditor’s meeting, the creditor that you owe for your house or car may send a document called a Reaffirmation Agreement to your attorney. A reaffirmation agreement is a document that your attorney will help you fill out. You have a choice of whether or not to sign a reaffirmation agreement. It asks for your monthly household income, monthly household expenses, and how much you still owe on your house or car. The document also asks how much your monthly payment is on your house or car, and will ask you and your attorney if you have enough money each month to make your payment on the debt that is referred to in the reaffirmation agreement.
Let’s pretend you have one mortgage and two car payments. You will receive a reaffirmation agreement for each of those payments – for a total of three reaffirmation agreements. Your attorney will guide you in which of the document should be filled out. In North Carolina, the bankruptcy Judges have discouraged the signing of reaffirmation agreements for real property (in other words, your mortgage) unless there is a change in the interest rate or monthly payment under the reaffirmation agreement. Reaffirmation agreements are most often signed for vehicles. In most districts, if you do not sign the reaffirmation agreement for your vehicle, then the creditor has the right to repossess the car.
If you do sign the reaffirmation agreement for a car payment, and the document shows that you are able to afford the monthly payment, when the document is submitted to the court, there will generally not be any problems. You will get to keep your car as long as you keep making the payments. However if, in the future, you are unable to make your car payments, the creditor has the right to repossess the car and you will be responsible for any deficiency balance after the repossession. If you sign the reaffirmation agreement but the document does not show that you are able to afford the monthly car payment, there will be a court hearing in front of the bankruptcy Judge for you and your attorney to explain why you should be able to keep your car.
If you do not sign the reaffirmation agreement for a car payment, the creditor will have the right to repossess your car. If you do not sign the reaffirmation agreement for a house payment, you will be able to keep your house as long as you continue making the payments. If, in the future, you are unable to continue making your house payment, the creditor will have the right to foreclose on your home BUT you will not be responsible for any deficiency balance after the foreclosure.
Reaffirmation agreements can be complicated, but your attorney will guide you through the process. Reaffirmation agreements are to be submitted to the court no later than 45 days after your first scheduled creditors’ meeting date. If you have not heard from your attorney regarding your reaffirmation agreement within 3 weeks after your creditors’ meeting, contact your attorney so that they can request the reaffirmation agreement from the creditor.
Anyone who tells you that bankruptcy won’t hurt your credit is lying to you. Bankruptcy will hurt your credit initially. However, if you are interested in filing bankruptcy your credit is probably already damaged quite a bit or is well on its way to being damaged. One of the nice things about bankruptcy is it allows you to hit the “refresh” button to start over. The question on whether a bankruptcy will hurt my credit is an easy one to answer. Yes. The more important question we should really be asking is: Can you rebuild your credit after filing bankruptcy and, if so, how? Yes, you can rebuild your credit after filing bankruptcy.
Today CNN is running an eye opening article about the tactics and strategies used by debt collectors or creditors. The article covers 10 different people who used to call and harass people for a living. They unveil some of the extreme tactics that creditors use to get money from debtors. A common theme that is seen throughout the ten different stories is the fact that these people make their money by collecting money.
Many of these creditors are on commission and the more money they bring in the more money they make for a living. Is this the best way to ethically collect debt? We too often see that creditors will bend or even break consumer protection laws simply to make a little more money. If they aren’t being commissioned then maybe there would be more civility in the debt collection profession. Regardless, this is a great article by CNN – check it out. The article is called Confessions of Former Debt Collectors.
Due to unforeseen circumstances, sometimes a person in a Chapter 13 bankruptcy will need to take out a new loan to get a car. This can happen if, for example, the car that you were driving when you filed the bankruptcy is in an accident or breaks down beyond repair.
You can buy a car while you’re in a Chapter 13 Bankruptcy. However, you must obtain approval from your Chapter 13 Trustee in order to finance a car while you’re bankruptcy. The Chapter 13 Trustee can generally approve a credit request for up to $15,000.00.
It’s important that you contact your attorney so he or she can advise you how to proceed. You will need to find a car you want to purchase and obtain the terms of the loan from the lender/dealership. It will be necessary for your attorney to update your monthly income and expenses prior to submitting the request for credit authorization to the Trustee. You need to be able to show the Trustee that you can afford your Chapter 13 plan payment and a new car payment.
Your attorney will submit a credit authorization request form to the Trustee, with the terms of the loan, including the amount of the loan, the interest rate and the monthly payment. It can take up to ten (10) days for the Trustee to approve the request. Once you have final approval from the Trustee, the car can be purchased.