What you need to know about the first stage of rebuilding your credit after bankruptcy.
Once you complete your bankruptcy filing and everything is said and done, it’s time to start rebuilding. One of the first places you start is your credit.
Let’s be honest – it’s almost impossible that you’d get through bankruptcy with your credit intact. Even if you somehow managed to keep up with all of your payments, avoid collections accounts, and never overdraw an account (why did you file?) – even then, you’d still face an extremely harsh 7-10 year penalty from the bankruptcy, itself.
Fact: While Chapter 13 bankruptcy has a 7-year penalty, a Chapter 7 bankruptcy has a harsher 10-year penalty.
So once you complete your bankruptcy, you need to start rebuilding. Credit repair is the first step in that process. Here are five things you need to know about getting your credit repaired once your debts have been discharged.
Tip No. 1: Know when your penalty clock started
Seven to ten years is a long time. The last thing you need is to have the penalty stay even longer. By law, a bankruptcy remains on your credit report for a certain number of years, starting from the date of your filing.
This is good news, because the clock’s probably already been ticking for a while before you’re even ready to start building. A payment plan for a Chapter 13 bankruptcy can take 3-5 years. So if you filed 5 years ago and you’re ready to rebuild your credit, you really only have about 2 years left on the penalty.
Tip No. 2: Check your account statuses carefully
Each account on your credit report has an account status associated with it. Once your bankruptcy is complete, every account included in your filing should say “discharged” or “included in bankruptcy.”
If you see anything else in the account status field for any account, then it is probably a mistake and it needs to be corrected. This includes statuses like, “active,” “current,” “delinquent,” or “charged-off.”
How many credit reports do you have to check if you want to correct your credit effectively?
d) None – after bankruptcy, you’re better off ignoring your credit
Each of the three credit bureaus have their own version of your credit report and can differ. You have to check all three to ensure accuracy.
Tip No. 3: Make sure all balances are zeroed out
Another line you want to look at on each account is the current account balance. Even if the status is correct, an account may still have a balance listed that it says you owe. Following bankruptcy discharge, every account should list a zero balance. If you show a balance, have the mistake corrected.
Also, make sure that the creditor or lender hasn’t moved your balance to another account or opened a new account with the money still owed in an attempt to collect. In rare cases, creditors will convert or re-age an account to get around bankruptcy discharge.
Tip No. 4: Keep an eye on any collection accounts
Collection accounts are often common to find on your credit reports if you’ve been facing financial distress. In most cases, a paid collections account will remain on your credit report from seven years from the date of final payoff. However, in some cases, arrangements can be made with the collector to have the account removed from your credit report once the agreed upon payment is made.
If either before or during your bankruptcy an agreement was reached to remove a collections account once the payment was made, make sure that the account was actually removed. Hopefully, you have the promise to remove the account in writing so you can submit it with your dispute when you move to correct your credit.
Tip No. 5: Assess what you’re losing
When you complete your bankruptcy, you’ll be clearing off a lot of bad debt out of your credit file, but you can also clear away some good things. The way credit scores are calculated, having certain types of accounts and a specific number of accounts matters to your credit score.
So you need to know how some things that can happen during bankruptcy can drive down your credit score. When you’re reviewing your reports, make sure you don’t have any of the following:
- Less than two credit card accounts left open following your bankruptcy
- A open mortgage in good standing
- An open credit card account in good standing utilizing high level of the available credit line
All of these things provide “bonus points” on your credit score. If all of your credit card accounts are closed and you lose your home, you can experience an additional decrease on your credit score over and above the penalty for bankruptcy.
Also don’t have your oldest closed accounts removed from your credit reports just because it says “included in bankruptcy.” The length of your credit history is a determining factor in your credit score, so removing your oldest account decreases the length of your credit history and can drive down your credit score.
Finally, watch out for applying for too many lines of credit in a six month period. The number of credit applications you make in six months also has an impact on your credit score. Only apply for one credit line at a time and make sure you can manage the debt before you apply for another credit card or loan.