Bankruptcy Resources Credit Report • Author Mark Martella, Esq • Jul 15, 2016
Whether you have filed for bankruptcy and received your Discharge, or have had a life changing event that caused you to fall behind on your bills and and take a big hit on your credit report, neither event is fatal and you can rebuild your credit. Ironically, it may actual be easier to rebuild your credit after filing bankruptcy since you may no longer have any unsecured debt.
If you have received your Discharge, you have become a good credit risk. First, you have eliminated all of your unsecured debt, and any secured debt that you kept presumably is debt that you can afford. Also, you are a good credit risk since if you filed a Chapter 7, you cannot file again for eight years and, if you filed a Chapter 13, you cannot file again for four years. This is what is meant by the fresh start that you get by the Discharge provided in bankruptcy. It is as if you went back to being 18 and just graduated from high school, or 22 and just graduated from college. At that time, you had no real credit history so, therefore, you do not have a great credit rating. Likewise, now that you have received your Discharge, you have a fresh start to re-establish your credit.
The following are five steps that anyone can do to reestablish their credit if they have the required self-discipline:
Paying your Debt ON TIME
If you reaffirmed a debt such as your car loan, or you kept your house and are making mortgage payments, presumably throughout the bankruptcy you made your payments on time and you will continue to make your payments on time. Being “on time” with your payments is a factor that is very important for rebuilding your credit history. Therefore if you have a payment that is due on the first of the month, make sure it gets there on the first or prior to the first. One of the slippery slopes we see when people are facing financial difficulty is they stretch out when they send the payment in to the very last day before it becomes late. Even though there is a “grace period”, by not making your payment by the due date, it does affect your credit history.
Obtain a secured credit card
A secured credit card works by depositing a couple of hundred dollars with the credit card company, and then charging against that deposit each month. You don’t want to run up large charges on the card. Just charge small items such as one or two tanks of gas and pay the bill as soon as you receive it. Again, the goal is to establish a stellar credit history for a minimum of 24 months after you receive your Discharge.
Obtain an Unsecured credit card
After a while, believe it or not, you will receive applications from credit card companies. They will be at a low level of credit for maybe only $500 or $1000. While many of my clients say that they will never get another credit card again, the reality is that in today’s society, you need the ability to have some credit, especially if you’re in the business world, for something as simple as obtaining a rental car or hotel when you travel. Again, you will treat this card just as you did the secured credit card and do not charge a high balance and pay it off to zero each month. Again, this will begin to develop your good credit history. Keep in mind that any new creditors will be looking at your history for the last 24 months. While again, you may be saying to yourself you don’t want a credit card and there’s no reason for you to do this, the reality is the better you can build up your credit, with a higher credit rating, it will be to your advantage when you need credit for the purpose of a car or need to obtain a home loan. Your terms of interest will be more favorable to you. If you have gone through the bankruptcy process and had credit cards, I’m sure you can remember your interest rate going from 7% or 8% up to 28% or 29%. Again, creditors lend money and charge interest based upon the risk involved. If you reestablish yourself as a “good” credit risk, you will receive a low interest rates and more favorable terms.
Get a Mortgage
Believe it or not, there ARE lenders out there that are willing lend to people who have filed for bankruptcy or face foreclosure after just two years from those events. Generally they are looking for some sort of hardship explanation as to why the person faced bankruptcy or foreclosure, which in most cases is not difficult to establish, and they may be willing to provide them with a loan. If that is one of your goals after discharge, I strongly suggest that as part of rebuilding of your credit that you also have a savings plan for maintaining that deposit for purposes of a home. If you can save up to 20% for a down payment, you will again get more favorable terms and save money than if you obtained a loan with only 3 or 5% down with having to pay for mortgage insurance and additional expenses. Once you have established your credit to obtain a mortgage and actually get a mortgage, you will follow the same process of paying your mortgage payment on time. Also, when deciding how much of a home you can afford, you should use no more than 30% of your gross income for your housing expenses (which include principal, interest, taxes and insurance). While lenders might use a higher ratio for your debt and living expenses, I recommend that you take a conservative approach and buy less house than what you think you can afford. [See Exhibit G for an inside look at how a banker views someone that views a potential borrower after filing for Bankruptcy when applying for a new mortgage loan].
Keep your “debt ratio” and credit balances low
Your “debt ratio” refers to how much unsecured debt you have compared to your annual income. To be safe and be able to handle all your debts going forward, your debt ratio should never exceed 10% of your annual income. For example, if you make $40,000, your total credit card debt should never be more than $4,000. Quite often, I meet with clients prior to their filing for bankruptcy that have an annual income of $40,000 and credit card debt of $35,000! You can never get out from under your debt under that scenario without filing bankruptcy. While you may say to yourself: “I will never get that much into debt again”. Well, I have had a number of clients who have filed bankruptcy for a third time due to credit card debts! So getting back into deep credit card debt can and does happen.
The second part of this Step 5 is to keep your credit balances low. What this means is that your credit balance (or amount you owe) should never exceed 25% of your credit limit. Therefore, if you have a credit limit of $1,200, your outstanding balance should never be more than $300.
The TRUTH about your Credit Report
The truth about your credit report is that no matter what you have done from credit standpoint over your lifetime, it is still on your credit report. If you are now 48 years old and you received a speeding ticket when you were 18 years old, that speeding ticket still appears on your credit report. However, the real issue is how far back does a creditor wish to look when examining your credit. The longer they look back the more expensive it is for the credit report. Therefore, depending on the type of loan you are applying for, they generally look back between anywhere from two to ten years. The “myth” that the bankruptcy does not appear on your credit report after 7 or 10 years, is just that, a myth. It will always be on there, however whether the chances of your creditor seeing it after 10 years is not that likely. What the creditor is more concerned about is more of your recent history from two to four years and what you have done during that time. As dark as things looked prior to your filing, I hope that you will see that upon receipt of your Discharge, there is the ability to reestablish your credit and join the economic mainstream by using available credit in a responsible and fiscally prudent matter.
How To Avoid Bankruptcy or Filing for a Second Time
I am sure that every one of my clients upon receiving their Discharge, thinks to themselves that they are never going through that experience again. Unfortunately, the reality is that individuals sometimes have to file two and even three times. While a second or third bankruptcy can be due to unforeseen circumstances with regard to health issues or a business catastrophe and lack of insurance, sometimes it is just an individual’s failure to break themselves of their bad financial habits that led them to bankruptcy in the first place. Therefore, I want to address things that you can do going forward to avoid facing the possibility of bankruptcy again.
Budget Budget Budget
For many people, filling out the bankruptcy schedules, specifically Schedules I and J which lists their income and expense, may have been the first time they have ever sat down to do a budget. However, once someone has gone through that process, they now have an outline as to what they need to do going forward. If you had been in a Chapter 13 Plan, you should be even more used to living within the budget since you lived with it for three to five years. Just because you receive your Discharge and no longer have to make a payment to the Trustee, that does not mean that you should not follow a strict budget going forward. If you can begin putting away the payments that you were making to the trustee towards savings, that will make a big difference in giving you the cushion you may need going forward should an unexpected emergency come up.
Self-Discipline and Sacrifice
Once you have come up with a budget, it is no good unless you follow it. I am always amazed at couples who will come to see me facing bankruptcy issues and they have a combined income of over $10,000 a month but can’t make ends meet. Generally, it’s not because they can’t make ends meet, but rather, they have no control over their spending habits and lock themselves into recurring monthly expenses that were beyond their means even being high income individuals. While their $650 Lexus payment may not seem like a big payment when you have a gross income of $10,000, when you add the insurance and maintenance fees to that and then decide to get a second car and a boat and finance a new pool cage and other home improvement repairs while also running up credit card debt, the interest payments alone put the financial noose around your neck. Therefore, once you have received your Discharge, you need to strictly follow the budget you have set out for yourself, which no matter what your income is, may require sacrifices on your part.
Unfortunately, we are not like the Federal government and can just print money when we need it. We must live within our budget. While it is difficult with Madison Avenue hitting you with all the images of the “good life” and the things you “should buy”, you need to be realistic and maybe not buy every new iPhone that comes out every other month and only buy things you truly need. Budgeting, self-discipline and sacrifice are imperative if you want to avoid filing bankruptcy again.
Institute a Savings Plan
Since you don’t have any credit cards upon receipt of your Discharge, and since you’ve probably been used to using just cash, you have already developed the good discipline on not relying on credit. The next step to take you over the top is to develop a savings plan. You should try to save a minimum of 5%, preferably 10% of your gross income each month for a rainy day. If you have additional income to save for your future retirement, that should be part of your savings plan as well. There are many financial advisors that can assist you with working out such a plan. Again, while saving may be difficult, even the smallest amount is better than nothing so that you have that nest egg to fall back on in case of an emergency.
Limit Your Credit Card/Unsecured Debt
While I discussed in the previous section that obtaining a credit card is not necessary a bad or evil thing to do after filing bankruptcy since it will help you to reestablish your credit. You must still keep in mind that you must be disciplined in your approach when using your new credit. Unfortunately, this is a double edge sword with improving your credit. Believe it or not, the better you do, the more credit card applications you will receive and the higher credit limits you will obtain. Again, clients I have seen who have to file for a third time have been able to get credit cards with balances combined for $50,000 to $60,000 after filing for bankruptcy two prior times. Credit card companies are like crack dealers giving out money. Instead of selling illegal drugs, they are giving out plastic to induce individuals to spend beyond their means. You must avoid these “credit devils” and maintain a disciplined approach to your spending. As you begin to get multiple daily applications for credit cards, have your home shredder ready to deposit the envelopes in them without even opening them up.
Be a Role Model for your Kids
Just as parent may be amazed when their five year old kid repeats something that they heard their parents say, whether it’s a dirty word or a comment about the other spouse, so too do children, especially teenagers, pick up on the spending habits of their parents. If you have gone through the bankruptcy process, it is important to share with your children the lessons that you have learned and teach them to do what is necessary to avoid the path of bankruptcy. Just as you teach your children to brush their teeth and maintain good hygiene each day, you must also teach them financial disciplines for them to succeed. Although in my own life I have met that challenge with mixed results, it is an important element of child rearing. I can assure you, based upon my experience, they’re not learning the financial lessons they need to learn in school! Therefore, it is your responsibility as a parent, if you are one, to instill the necessary financial lessons and disciplines with your children so that they can be successful in their future.
One additional item to consider (or reconsider) are the huge student loans our children and their parents are taking on to get a degree. While education is important, education at all costs can be financially fatal especially since student loans are generally not dischargeable in bankruptcy. Coming out of school with $100,000 worth of debt is like putting financial handcuffs and leg irons on your children (or yourself if you personally guaranteed those debts), which inevitably will make your financial success and your children’s financial success much more difficult if not impossible. For these reasons, it is important to look at all options by having a college savings account, scholarships, and even having your children work through college to help pay for the tuition versus taking out easily obtainable loans that quickly grow and become unbelievable financial monsters in the end. Proper planning of college finances is just as important as planning your families food budget. Too often I meet with people who have used their college loans to pay rent, food and car payments instead of tuition and then quit school after two years with no degree and $30,000 in loans.
If you follow the above outline of budgeting, self-discipline and sacrifice, I assure you that you will never have to meet with a bankruptcy attorney and that you will have a successful financial future.
If you have any further questions about bankruptcy or rebuilding your credit, simply e-mail me at firstname.lastname@example.org. If you would like to come to my office and meet me for a complimentary and confidential consultation regarding your financial position and to learn what your options may be for a bankruptcy filing or, outside of bankruptcy, please call my office at 941-206-3700 to schedule a meeting.
Contact a Bankruptcy Attorney
If you have a situation as we described in this article and have questions or concerns, please don’t hesitate to contact us to answer your bankruptcy legal questions.
Mark Martella, Esq.
18501 Murdock Circle, Suite 304
Port Charlotte, FL 33948
5237 Summerlin Commons, Suite 411
Fort Myers, FL 33907