According to The Wall Street Journal staggering record number of 1,530,078 bankruptcy filings were completed in the USA in 2010, which is an increase of 9% from 2009. Financial experts expect that number to climb even higher in 2011. With these kind of statistics, the real fear for many lies not in the bankruptcy, but in the ensuing period where the bankrupt tries to get their life back in order and rebuilds their credit. Rebuilding credit after bankruptcy can be a relatively simple process that starts with applying for new credit. How to best go about restoring credit after bankruptcy?
What to expect?
Once you get your judgement and are discharged by the courts, you can obtain a copy of your bankruptcy discharge notice. With that, its advisable to get your credit reports from the three major credit bureaus, so you can have them on hand when applying for credit. The best thing when approaching a new loan officer is to justify why you had no choice but to go into bankruptcy. If there were circumstances that caused you undue hardship, ie, job loss, major illness, divorce, etc, be up front about the role that they played in your bankruptcy. If illness, legal problems etc, not of your making were involved, even in a minor way, be honest about it in a positive way. Avoid trying to create some sort of scapegoat, such as blaming your ex or boss. Its best to characterize your situation in such a way that it can be seen as “happening to anyone”, while making yourself seem as an honest person of integrity and good work ethic. One caveat: it might be a good idea however not to be too honest, as things like arrests, drug problems and severe mental health issues can obviously work against you.
Be Honest About The Bankruptcy
You will have to account for your recent credit history since your discharge. Have this kind of information ready for the loan officer. The whole point about being as up front and forthcoming as can be is to paint a picture of integrity to increase the confidence of your lender in your discipline as an individual. Be vary of any slight untruth, as the scrutiny of a loan officer resembles that of detectives conducting interrogation of a criminal suspect. If they as much as suspect one small lie, they will likely assume that there are even bigger things you are hiding. Makes sense! If the loan application document asks (and it will), “have you ever filed for or declared bankruptcy?”, its best to leave that unchecked–which will give you a chance to explain the situation in person.
Your Employment History
There are some things that your work history should reflect. First, they will look for patterns of job instability and secondly, they will look for progress in working in one field, for example, are you jumping around from job to job? or, are you making progress in some line of work towards higher paying positions which entails more responsibility. A major arbiter of how responsible you are as a person to lend to, may to the creditor, lie in the personal fingerprint that your work history creates. If you are they type of person who has incrementally increased both your responsibilities in your job, and increased your earning potential–both while staying in the same line of work–that is something that will work for you, big time! the last thing that someone who is going to loan you money wants to see is someone who hops from job to job, has jobs with very little responsibility to the public, and hops around from field to field. On a loan application the following are can be detrimental:
- Being self-employed
- No utilities listed in your name
- Carrying too much debt (too high debt/credit ratio or total debt service ratio)
- Having too high rent or mortgage
- Not having citizen/permanent resident status
- Lack of marketable employment skills (minimum wage jobs aren’t a good thing)
- Lack of banking references (including both checking and savings account)
The best way to approach getting a loan after bankruptcy when you are self-employed to use a W-2 as a proof of your employment income (in Canada, use your T-4). If you don’t have one yet, you can use invoices and receipts. If your business is not incorporated, then it would be advisable to create a corporation or LLC and set yourself up as an employee with a salary and create your own W-2. Instead of renting an office space, you can use a mailbox service that offers a street address instead of a P.O. box. The nest step is to set up a phone number for the new corporation. Now you can respond to anyone who approaches you for a reference as you see fit.
Restore Your Credit After Bankruptcy By Obtaining A Secured Credit Card
To restore your credit you have to start somewhere and the best way to do this is with a secured credit card. A secured credit card looks like a credit card, but acts more like a debit card; you need to have a deposit account set up, usually with a minimum of a few hundred dollars to “secure” the credit on the card. It is vital to get one that reports activity to one or all of the three main credit bureaus, as this will allow you to restore your credit from nothing.
Shopping for a secured credit card requires some due diligence on your part, as there are many scammers rip-off artists in this field. Most important is to find out how long it takes to convert a secured card into a traditional unsecured credit card. 6-24 months is the usual time span. Questions to ask are:
- What is the minimum deposit required? (usually its under $500)
- What is the spending limit?
- To which credit bureaus is the payment history reported?
- What are the monthly fees?
- Can you check the balance online or by phone?
- What are the user fees? (some cards not held by major banks can charge exorbitant fees)
- Will the credit limit ever be able to exceed the deposit in the account?
- How are credit limits on unsecured cards determined–what are the criteria?
- Last and not least–will they accept a discharged bankrupt?
Getting And Using Secured Credit Cards
When using a secured credit card, try to gradually increase the credit limit as much as possible. If you can, find out what the limit on the unsecured credit card to start out with will be if and when you qualify for it. Then deposit as much as possible before the secured card transitions to an unsecured one. This will help you get as high limit as you can with the new card, and if if doesn’t come right away, it might be raised sooner with this method.
Your future unsecured credit limit will be the same as your secured card, perhaps you should deposit as much as possible
just before your conversion is processed. In that way you can quickly gain an impressive high-limit unsecured card credit reference. (If you can come up with the cash)
Using your secured credit cards will come with some obvious responsibilities such as paying your bills on time, always before the due date (making late payments while trying to rebuild your credit is such an obvious no-no) and be very careful never to exceed your credit limit. But there are some subtleties that can help you increase your credit limit quicker, such as using the card on a regular basis. Lenders want to see a steady pattern of responsible behavior with as much evidence as possible that you are diligent to pay what you borrow, regularly, on time. Use it for your monthly budgeted shopping and try to keep the balance owing on the card around 70-80%. That will make it look like you are disciplined in setting spending limits and sticking to them. That is what they want to see!
Remember the cardinal rules of using secured credit cards to restore your credit rating:
- Use your secured credit cards regularly and keep a balance that you can manage.
- Pay the bill early, before the due date
- Never exceed your card’s credit limit
After about a year with a solid track record of employment, residence, and paying your bills on time, you should likely be offered an unsecured credit card and your credit restored. The next step is to get some small department store credit cards and some affordable installment loans. Again, the most important thing is to show consistency *both* in your spending and paying patterns; show restraint in spending and diligence in making payments!