There are many myths which hold that it takes anywhere from 3-5 years to reestablish credit after discharging debt under Ch. 7 of the bankruptcy code. These same myths hold that you won’t be able to purchase a new car or house, and that credit card companies will not find you credit worthy for several years. While this myth may hold true in some very rare circumstances, it is generally a false statement that should be ignored by most consumers.
Although bankruptcy will have a very significant impact on a person’s credit, it certainly will not prevent someone from reestablishing their credit within the first two years following bankruptcy. While it is true that post bankruptcy applicants will pay higher interest rates, credit cards are not impossible to acquire. Don’t let these myths keep you from enjoying financial freedom when debt has consumed you and bankruptcy seems like the only viable alternative. Contact us for a free, no hassle consultation.
The following case scenario is a perfect example of how you can reestablish credit within two years of filing for Ch. 7 bankruptcy.
In 2011 Dantzman & Danztman Law Office helped a client file for Ch. 7 bankruptcy. His bankruptcy was discharged in October, 2013. For the sake of this article we will refer to this client as “John” to keep his name and information private. As of the date of this writing, John has a credit score of 758 – an excellent rating that he achieved in less than two years by following some easy, simple steps.
Case Facts:
After meeting with John and completing all necessary paperwork and “pre filing” courses, John had approximately $56,000 of liabilities. John was employed full time, earning an average of 31k per year. John had a few hundred dollars in his checking account, and had monthly expenditures of approximately $2,500. John had an unsecured credit card with a credit line of $3,500 which was maxed-out. Payments were past due and legal action had been commenced against him to recover monies owed.
Reestablish Credit Fast:
Shortly after his bankruptcy was approved and everything was discharged, John began investigating how he would reestablish credit for himself. His credit score at that time was just above 640 points. What he learned was that it is important to pay all bills on time, and equally important to attain one or two credit cards and reestablish credit by using the cards in a responsible manner. Within a few months of his discharge John received credit card offers in the mail with a 0% 12-month APR. John accepted the offer and began to reestablish credit by working on his credit score.
Responsible Credit Card Use:
The most important thing that John kept in mind is that he should never utilize more than 33% of all available credit. In other words, John never utilized more $166 of his available $500 credit limit on his credit card. After using his credit card responsibly, it wasn’t long before he received another credit card offer. This time the credit limit was set at $750, and John accepted. John first made certain that the balance of the first card was at zero, and then began using the second card. Again, John never exceeded using 33% of the $750 credit limit.
Reestablishing Credit Worthiness:
John realized that these offers were a great opportunity to reestablish his creditworthiness. We all know that trust is earned, and with a credit card it is important to show a pattern of trust over a period of time.
To do this John took things a step further by making a purchase of a few hundred dollars, and then scheduling the debt to be automatically paid each month at the minimum limit. By doing this John was able to show, not only responsible spending under the 33% , but that he could be trusted to make timely payments over an extended period. Again, John received a third credit card offer in the mail with a $1,000 credit line, which he accepted.
Within Two Years:
Today John has three credit cards that he utilizes carefully to keep his credit in check. In the past six months John’s credit score rose 50 points; putting him in an excellent credit rating category. His annual income is pretty much the same, and he is beginning to see the benefits of being a responsible spender within two short years.
He and his wife are on their way to purchasing a home in early 2014. That’s right! Despite bankruptcy, John has proven his creditworthiness to such a degree that lenders are willing to take a risk with him in purchasing a home just two short years after bankruptcy. This may be rare, but John made things happen by following a simple strategy.
The Truth about Quickly Reestablishing Your Credit:
Despite having filed for bankruptcy it is important to realize that you as an individual are responsible for where your credit score lies and how long you will allow the bankruptcy to hold you down. Even if you hold a minimum wage job, credit is attainable over a short period of time. Either you listen to the myths and not even try to rebuild your financial reputation, or you take advantage of an offer an act responsibly. The simple practices noted above will work for you too, but you have to be responsible and frugal in your spending practices.