Posts Tagged ‘credit history’

Repairing Your Credit After Bankruptcy

Apr 28, 2010 • 2 Comments • Bankruptcy, Personal Finance

If you are considering filing for bankruptcy protection, you have likely considered what effect it will have on your future finances.  After all, bankruptcy is a matter of public record, and the bankruptcy will remain on your credit report for 10 years.  In addition, your credit score will take a major hit when you file.  Reality check: it won’t be as bad as you might think.

The first few months following your bankruptcy filing will be the hardest.  Most lenders run a credit check and will see your bankruptcy, making obtaining financing or credit more difficult.  The older the bankruptcy becomes, the less effect it will have on your credit.  In fact, the impact of the bankruptcy on your credit score will begin to diminish immediately after your case is closed.   The more committed you are to rebuilding your credit, the more quickly it will improve. 

GET A CREDIT CARD

Ironically, the very best way to go about repairing your credit after a bankruptcy is to obtain new lines of credit.  Potential lenders’ reasoning is this: the worse your credit history, the more you need access to open credit lines to demonstrate that you are a trustworthy borrower.

Most of my clients begin receiving credit card offers almost immediately after their bankruptcies are finished.  If you cannot obtain an unsecured credit card, however, you should take out a secured card.  Secured cards are like prepaid lines of credit, and will allow you to book hotel rooms, purchase airline tickets, and travel without cash.  In addition, many secured card lenders punctually report timely payments to the three major credit bureaus.  This will give your credit score a big boost, making it easier to get an unsecured card or a line of credit down the road. 

While credit cards are one of the best ways to repair credit after bankruptcy discharge, you must pay your credit card balances entirely, on time, every month.  Even one late or missed payment will set you back significantly. 

GET AN AUTO LOAN OR MORTGAGE

Car loans usually become possible after about a year from your bankruptcy discharge.  The rates are  usually not very attractive, but these will improve the longer you wait after your bankruptcy case is closed.  Mortgage loans are usually possible after two years from your bankruptcy discharge.  With either auto loans or mortgages, be sure to shop around for the best rates.

MONITOR THE CREDIT BUREAUS

Approximately four months after you receive your bankruptcy discharge, you should run your credit reports to ensure that they are accurate.  After all, your goal post-bankruptcy is to boost your credit score quickly.  Inaccurate information on your credit report will only prolong the time it takes to score high enough for conventional credit.  You should request reports from all three of the major credit bureaus: Experian, TransUnion, and Equifax.  Carefully review all of the entries on each report.  Debts that were discharged through bankruptcy should be accurately reported along with “good items,” including accounts that were “paid as agreed” and any other accounts that you continue to pay on time that were not discharged in the bankruptcy.

If you find any discrepancies, you must contact each of the bureaus separately, in writing, and request that they change the information.  It may also help to contact the creditor and request that they report the accurate information to the bureaus.  In another four months, you should repeat the process.  Credit bureaus generally have 30 to 45 days to investigate your claim.

You can request a free copy of your credit reports once a year at http://www.annualcreditreport.com. 

BE PATIENT

If you pay your bills on time and in full every month, your credit will steadily improve.  The more time that elapses since your bankruptcy discharge and the more quickly and effectively you engage the above strategies, the quicker your credit score will recover.

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Can I Buy a Car While in Chapter 13 Bankruptcy?

Apr 25, 2010 • 2 Comments • Chapter 13

You are in Chapter 13 and you need some wheels. It is possible to purchase a car while in an active Chapter 13 case, however because you (and your bankruptcy “estate”) are under court protection, you will need to go through a few extra steps than the average purchaser.

TALK TO YOUR ATTORNEY

If you can save enough cash during an open Chapter 13 to purchase a vehicle outright, then you may simply buy the car. Most debtors, however, require financing from a lender. You can still purchase a vehicle with financing while in Chapter 13, however you must first discuss it with your attorney.

The whole point of filing a Chapter 13 is to obtain a discharge, which is a permanent injunction from the court that releases the debtor from personal liability for his or her debts. In a Chapter 13, a debtor obtains a discharge by successfully completing a Chapter 13 plan, which is a repayment plan providing for payments of fixed amounts to the trustee on a regular basis, typically biweekly or monthly, for 36 to 60 months. The trustee then distributes the funds to creditors according to the terms of the plan. If the purchase of a vehicle will impair your ability to fund the Chapter 13 plan, then your attorney should advise against it.

FIND A DEALER WHO WILL EXTEND FINANCING

Unless you have a close friend at the local dealership, obtaining financing while in Chapter 13 may be difficult. Bankruptcy is the worst thing that you can have on your credit report, and it will remain there for up to 10 years Many factors will affect your ability to obtain financing, including your pre-bankruptcy credit history, your debt-to-asset ratio, the amount of your down payment and your income. “Bad credit” car loans have very poor interest rates, sometimes as high as 23 percent.

Vehicles are a necessity for most debtors. Although it is generally advisable to wait for at least a year after bankruptcy to obtain vehicle financing, often a debtor will have no choice. Request the terms in writing from a willing lender and provide them to your attorney.

GET YOUR TRUSTEE’S O.K.

The trustee will automatically object to the purchase of a luxury car. In addition, the trustee will object to your incurring new debt for any vehicle unless you can show that you will be able to afford the monthly payment in addition to your Chapter 13 Plan payment.

The purchase of a car often entails the incursion of additional monthly expenses–such as gas and insurance–beyond the cost of the car loan itself. The trustee wants the debtor to complete the Chapter 13 plan according to the exact terms of the confirmed Plan. You must therefore address the trustee’s concerns that the incursion of the new debt–the car loan–will not impair the debtor’s ability to repay the debt. The trustee will carefully scrutinize any amendments to your income and expenses

If the trustee does not believe that you need a new vehicle, or believes that taking on more debt will impair your ability to fund the Chapter 13 Plan, then you should reconsider the purchase. If the car is an absolute necessity, then proceed with a Motion to Incur Debt and let the judge decide.

FILE A MOTION TO INCUR DEBT

In an open Chapter 13 case, debtors are required to obtain the bankruptcy court’s permission before taking on new debts, including new car or home purchases. Your attorney will file with the court a Motion to Incur Debt, or in some jurisdictions, a Motion for Authority to Incur Debt.

The motion will assert that the terms of additional debt are reasonable, necessary and will not interfere with the confirmed Chapter 13 plan. The motion will be sent to all creditors and parties in the case and will also be set for a court hearing. As long as you can show that you will be able to make your monthly bills and new car payment, as well as, most important, the trustee’s payment, the motion will in most cases be granted. Your attorney will charge you a fee for the motion, notice and hearing, and that fee will be granted by the judge and paid by the trustee.

FOLLOW THROUGH

Buying a car will not be very helpful if you default on the monthly payments. Moreover, because the debt is post-petition, you may not include it in your Chapter 13. If you have a choice between making the car payment and making your Chapter 13 payment, in most cases it will be better to lose the car you just purchased to repossession than to default on your Chapter 13 Plan. No one can foresee events that may lead to your inability to make payments on the car, which is exactly why it is so important to carefully weigh your options–before your purchase–with your attorney.

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