Life after bankruptcy
Declaring bankruptcy isn't easy, but at times it's the only and best thing to do. While it can and will take a toll on your mental and physical health, it does not spell the end of the world. Neither is bankruptcy a life sentence. There actually is life after bankruptcy.
It's true that Chapter 13 bankruptcy remains on your credit reports for 7 years and a Chapter 7 for 10 years. But this does not mean that you have to wait ten years to rebuild your credit.
With the right tips and correct guidance, you will be able to not only rebuild your credit but also start afresh in life and even buy a car and home after bankruptcy.
1. Credit after bankruptcy
Before working at rebuilding your credit after bankruptcy, first take a look back to find out what lead to your bankruptcy in the first place. It's usually some habit like impulsive shopping, wrong financial decisions or money mismanagement.
Determine what went wrong so that you don't repeat the same mistakes again. It's worth taking a debtor education course. You learn various useful and important skills like how to budget your expenses and use credit properly. These skills can help prevent future financial problems.
- Check credit reports
This done, it's time to check your credit reports. Get them from not one, but all three credit bureaus- Experian, Equifax, and TransUnion. You need to check to ensure all your offensive accounts are no longer mentioned.
You, however, have to wait and check only 90 days after filing for a Chapter 7 bankruptcy. In case of a Chapter 13 bankruptcy, you have to wait for 90 days after the discharge of your bankruptcy. The discharge may, however, take 3-5 years.
- Dispute any errors
All your affected accounts should mention that they were ‘included in bankruptcy'. There shouldn't be any connected balances, pending amounts or late payments to be made after the bankruptcy discharge filing date.
Dispute any errors you find with the respective credit bureaus. It's only after everything is cleared should you consider applying for fresh credit. Most card issuers don't accept applications from delinquent account holders.
- Create a positive credit history
It also helps if you manage to establish a positive credit history. Try getting added as an authorized user for someone with good credit card management skills.
You may not get any credit card. However their responsible use of cards and consequent payment details will be included in your credit reports. You can also apply for credit builder loans where you pay yourself back with time.
It helps because the credit bureaus will be intimidated about all the payments you make. These tips may not help improve your credit score, but do help nullify all the damage done.
- Secured loans are better to start off with
It's once your credit score improves that you can apply for a credit card after bankruptcy. A secured card is the best first choice. These cards need a deposit which both secures your account and serves as your credit limit.
While the interest rates and fees for these cards are high, and there aren't any rewards like cash back or points, they assist in rebuilding your credit. There is another reason to use secured cards. All payments made are reported to the credit bureau, which proves beneficial to you.
- Choose the right credit card
• Be careful about the cards you select.
• Some credit card applications can affect your credit scores.
• Choose cards you feel you feel may give you an approval.
• Cards with low or no annual fees are always better
• Cards which report to all three bureaus are always a better choice. There's no point applying for a card that doesn't because it won't help build your credit.
Whichever card you finally select, read the fine print before filling forms. This is to ensure the card company doesn't have any problems with bankruptcy cases. Also, make sure you pay your bills on time to avoid interest and to build your credit score.
2. Vehicle after bankruptcy
Most people coming out of bankruptcy think that they will never be able to buy a car or home again. However, there's good news. Once your Chapter 7 bankruptcy gets discharged, following these tips can help you eventually buy a car after bankruptcy.
- Clear your existing car loan
If you had a car loan before going into bankruptcy and still have the car after the bankruptcy, first work at clearing the loan. It proves your responsibility towards car financing and gives you a better chance at getting a car loan.
- Rebuild your credit rating
As mentioned earlier, work at building your credit rating. You'll need about a year to build your credit score and get an auto loan.
- Dealerships working with bankruptcy
If you are in a hurry to buy a car, then look for dealers that specifically cater to people who have filed for bankruptcy. You'll, however, have to look around for the best deal because they charge high-interest rates.
- Get your papers right
Keep all your bankruptcy discharge papers, recent pay stubs, the latest credit report, your driver's license and auto insurance policy ready. You never know which agency the dealer and lender pull reports from. It's better to be ready for anything.
- Save for the down payment
It helps if you manage to save even $1000 to pay as down payment. It lowers your interest rate. It also helps convince lenders that you qualify for the loan if you are a borderline case for loan approval. You can get an even better deal if you have a car. Try selling it yourself instead of trading it with the dealer.
- Don't be fussy about the car
Don't be persistent about a particular car or model, or whether you should buy a used or new car. Be flexible unless you need a specific vehicle like a truck for work purposes. With flexibility, you'll be able to find the best car at the best interest rates and value.
- Look for a pre-approval
It's better, and also saves your time if you get pre-approved before approaching dealers and lenders. A pre-approval gives you an idea of the amount you can finance. You can then search for a vehicle in a price range you can afford.
- Say no to buy here, pay here
Avoid buying here, pay here dealerships because they are the worst option you have. Their down payment amount usually pays for the vehicle while their additional charges are their profit. They charge high interest rates and are really tough with debt collections.
- On time payments
Make sure you about pay your car loan installments on time. If possible, make an advance payment or at least schedule to pay the installment about a fortnight before the due date.
If you first had a high-interest car loan, you can consider refinancing with a new lender at a lower interest rate. Do this after making punctual payments for six to 12 months, and once your credit score improves.
3. Home after bankruptcy
Buying a home is the last thing you feel possible after filing for bankruptcy. Though you need time to heal after a bankruptcy, it's not impossible to buy a home.
Bankruptcy is indeed detrimental to your financial status. But with a little time, patience, commitment, effort, and the following tips it is possible to buy a home after bankruptcy.
You once had to wait for years after filing for bankruptcy to be able to apply for a mortgage loan. However, bankruptcy mortgage guidelines have been relaxed recently.
Different mortgage types charge different rates and waiting periods based on the bankruptcy filed:
• In case of a VA, it's a 2-year wait for a chapter 7 discharge and 1 year if you make on-time payments for a Chapter 13.
• In case of a USDA, it's a 3-year wait for both chapters 7 and 13.
• In case of Low Down Payment Govt., it's 2 a years wait for a chapter 7 discharge and 1 year for punctual payments for a chapter 13
• In case of Conventional loans, it's 4 years for a chapter 7 and 2 years for a chapter 13.
The abovementioned periods, however, do not start automatically after filing for bankruptcy. There are a few things you have to do before it starts, and you get a chance to eventually buy a home after bankruptcy.
- Rebuild credit
Once again, the first thing to do is rebuild your credit.
With there being certain time periods to wait before you can buy a home after bankruptcy, you need to be patient. Use this time to improve your financial situation and look for lenders who may be ready to work out something with you.
There are some nonbanking lenders who help risky borrowers who had undergone a bankruptcy, short sale or foreclosure get mortgage loans. But make sure you read the fine print before applying for these loans. The loan may not be right for you. It may even be risky with higher interest rates which you may not be able to afford and repay on time.
So you see, life doesn't end after a bankruptcy. You don't even have to wait 7 to 10 years before you can do anything in life. Just be patient, and work proactively at improving your financial habits and consequent credit score and rating.
Start by building your credit and slowly work up to buying a car and house. Just make sure that you manage your credit well and make all your repayments on time to avoid any potential future bankruptcies.
It helps if you set up auto pay or create reminders to pay your payments on time every month. Keep checking your balances and restrict your credit card balance to 10% of your available credit.
Last, but not least, even though you are in a hurry to build credit and start life afresh, do not try to open too many accounts at a time. Go slow and open new accounts gradually, as required. You will soon find your life getting back on track, where you want it.