Starting Over

Starting OverBankruptcy hurts your credit score.  Your credit score is how lender’s determine whether you are going to be a good customer or not, and bankruptcy means many of your creditors did not get what you agreed to pay them.  Many people believe that they are not allowed to borrow money for a certain period of time after they file bankruptcy. You are not allowed to borrow money while you are in Chapter 13, Chapter 12, or Chapter 11 without permission (sometimes from the Court, sometimes from the Trustee).  After your bankruptcy is closed (or with the required permission) you are allowed to borrow.  However, lenders are not required to lend to you.  Some will, but you will pay a premium for being high risk in the form of higher interest rates, and the amount they will be willing to lend to you will be less.  Unfortunately, while you just got out of debilitating debt, the only way to rebuild credit is to borrow money, and pay it back.

For some people, that may mean a credit card that either requires a security deposit or just has a very low credit limit. Charge something every month, pay off the bill in full every month and your credit score goes up every month.  It does seem to be true (the formulas for determining credit scores are closely guarded secrets) that paying in full doesn’t boost your credit as much as paying most of your balance does.  That makes sense because the score is supposed to tell lenders whether you are a good customer, and they make more money if you maintain a balance (as long as you don’t default).  Even though your credit will rise more slowly, the difference is not worth the interest you will pay, let alone the risk that you will get back into a situation where your debt load is more than you can handle.

Other people count on staying current on their secured debts, such as a house or car. If buying a new car is a priority, there are some important things to remember.

First, stay away from huge dealers. A small or mid-sized dealer is probably more willing to work with people with lower credit scores.

Second, lower your expectations. You don’t have to buy the cheapest car on the lot, but you probably won’t qualify for the nicest one, and you don’t need it.  Remember, you want to own a car, not be owned by a car.  When I see people lease cars they could not afford to buy or finance them and trade them in as soon they have enough equity to make a down payment on a new car with the highest payment they can qualify for, I know their quality of life suffers, their stress level is through the roof, and they are likely candidates for a future bankruptcy.  It’s better to own a modest car outright than to rent a luxury car, and if you are leasing or financing without equity, you are renting.

Third, be upfront with the lender. Before the salesperson runs your credit report, tell him or her that you filed bankruptcy (they will find out anyway, and if they ask directly and you deny it you are committing fraud). If you can provide a reasonable explanation for why you filed (such as unemployment) and offer a convincing reason why your financial circumstances have changed (you’re working now), lenders are much more understanding.

You also should wait until after the 341. If you filed Chapter 7, you may need to wait until the discharge. That’s only an extra few months anyway. If you filed Chapter 13, you may need the trustee’s permission to acquire new debt. Make sure the payment fits comfortably inside your current budget.  If you cannot afford to pay your ongoing expenses AND put away some money for a rainy day, it does not fit within your budget.

If you are trying to rebuild your credit, savings is crucial.  If you do not have savings, any gains you make in rebuilding your credit are a broken transmission, layoff, or illness away from being undone.

For a free consultation with attorneys who can help you get a fresh start, contact our office.

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