The Impact of Bankruptcy on Your Credit Rating

Of all people who declare bankruptcy, most improve their credit rating afterwards. That’s because clients who come seeking to declare bankruptcy have a poor credit rating by the time they get to that point. If you think about it, it really makes perfect sense. You do not go from financially stable to bankruptcy overnight; there are a host of things that happen along the way. Things like missed payments, delinquent payments, maxing out credit cards, repossession, and debt collection efforts all bring your credit rating down as they happen.

Without bankruptcy or repayment, nothing happens, and thus no improvement. After bankruptcy, some debts are eliminated, sometimes repayment plans are instituted, agreements are met, and many other positive things that improve your credit rating. Now tell me, if you were a mortgage lender, wouldn’t you favor a prospective credit candidate who got their affairs in order, declared bankruptcy, settled what they could, and started on a fresh new path rather than someone who just did nothing? I know I certainly would. All lenders are people first; they understand that sometimes life’s circumstances impede a person’s financial stability. Bankruptcy is not free, or simple, and lenders know this. They know it takes initiative to do it, and respect that. Bankruptcy is not something anyone really wants, or intends to do. If you had the choice between no debt and no bankruptcy, or no debt and bankruptcy, of course you would pick the former. However, bankruptcy may be your ticket to a better financial future, and you absolutely can get credit afterwards.

Secured credit is an effective tool for people who have declared bankruptcy in the past. The process is simple: send them a cash security deposit, and they will extend you a credit limit close to or less than that amount. The most common type of secured credit is secured credit cards. Those cards are everywhere online, and even in your mailbox if you wait long enough.

The key to using secured cards to your benefit is to only use them when you already have enough cash to pay for the item, and can immediately send in the payment on time. Why? Because the interest rates on those cards are typically much higher than with a regular credit card. Why? Because they know you would have trouble getting credit elsewhere, so they counter the risk with a high interest rate. You could wind up paying $80.00 for a Gatorade if you are not careful. You can refuse to pay, but they will just take your deposit, close the card, and report the negative status to the credit bureau, which lowers your credit more.

The average waiting period for buying a home is two years. Granted, applying for a mortgage loan shortly after declaring bankruptcy is no doubt an uphill battle, but it is possible if you have saved a down payment. Otherwise, while mortgage terms constantly change, you will find that after 2-3 year you will qualify for VA, FHA, USDA and conventional loans. If you have saved a down payment of 10-20% if can be a far shorter time period.