Expert Q&A Archive
Establishing good credit after filing for bankruptcy.
A very close friend of mine filed about two years ago. She is having a very hard time establishing credit. Even though she has credit cards for about six months after the fact. She also has a student loan. Is there hope of her purchasing a home, or does she have to wait until the ten year term is up? Does Chapter Seven come off her credit in seven years? I really want to help her; she is very stressed about this issue.
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I hope this helps with some of your friend's questions regarding her bankruptcy filing. Chapter 7 will remain on her credit report for 10 years. However, this does not mean that she cannot establish credit or buy a house in the meantime.
There are some steps she'll want to take to help her on this journey.
First, have her contact the credit reporting agencies (Equifax, Experian, and TransUnion) to obtain a copy of her credit reports. She wants to make sure that the debts that are supposed to be discharged from the bankruptcy are accurately noted on her credit reports. Contact them in writing to have any errors corrected.
Second, to start establishing good credit, have her get a secured credit card. This means she will need cash in the bank to cover any charges made on this card. They usually have a lower limit and are a good way to get started. After a period of time where this card has been paid in full on a monthly basis, it should start becoming easier for your friend to establish other avenues of credit.
Remember, building back credit will be slow process. It is helpful for the person to have built up solid financial habits - spending less than income, building up savings, remaining debt free, etc. Once credit is built back up, it is crucial that these habits are in place so the bankruptcy can be a once in a lifetime experience.
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There is absolutely no reason why your friend cannot reestablish credit and even get a mortgage after bankruptcy. A Chapter 7 bankruptcy does remain for ten years from the date of filing, but there are plenty of things your friend can do to rebuild credit in the meantime. Some mortgage lenders have programs for consumers less than a year out of bankruptcy. Here's some advice I give that you can pass on to her.
Most people feel like they are on the bottom of the ladder financially after a bankruptcy or credit difficulties. But there is a lot you can do these days to rebuild your credit after filing.
1. Review your credit report carefully for mistakes or inaccuracies. Debts that were included in a bankruptcy should reflect a zero balance once the debt is discharged. For accounts that were sent to collections, it's normal to see both the original account listed (perhaps with a notation "included in bankruptcy") as well as a subsequent collection account. Both the original account that was charged off, and one collection account (the most recent one) may be listed. But they should both show zero balances, and you shouldn't see multiple collection accounts for the same debt. Dispute any that are duplicates.
2. Watch reporting dates carefully. If the lender or collection agency doesn't supply the correct information about the original date of delinquency to the credit bureau, negative information may remain longer than it should. Keep a copy of your credit report as it appears now in case you need it later to dispute the length of time this information remains on your report.
3. Rebuild your credit. Most mortgage lenders that extend credit to consumers who have been through bankruptcy want to see four positive accounts established and paid on time either through or after the bankruptcy. With time, the old information will become less important and the more recent information will become more important. My experience has been that consumers who take the initiative after a bankruptcy can rebuild their credit to a point where they get decent credit offers in as little as two or three years. Of course, nothing is guaranteed, and be careful of companies who say otherwise!
4. Get credit. Make sure you have a major credit card that is reported each month to each of the major credit bureaus. You don't have to carry debt, but use them to keep them active and pay the bills on time each month. If you don't have a major credit card shop for a secured credit card (one that requires a security deposit) that will help get your credit back on track. Visit CardRatings.com, CardTrak.com or Bankrate.com for information on secured cards.
Finally, I'd recommend you talk with a mortgage broker who specializes in working with consumers with credit problems. Be careful -- there are some predatory loans out there -- but there are some programs with reasonable terms that can help you get into a home.
5. Avoid credit repair rip-offs. You may be tempted to buy your way to a new credit history. But some of the offers you'll see advertised may actually make your situation worse! Read our section on Credit Repair Organizations in the Knowledge Center before you turn over any money to one of these companies.
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There are a couple of issues being addressed here. First is the issue of your friends credit. Credit is difficult to address in this forum because credit issues are different for everyone. Your friends credit problems may go beyond her bankruptcy - I'd have to look at her credit to pinpoint specific areas that need to be addressed. Your friend needs to start doing some research - knowledge is power. Here is a list of web address that I find very useful for educational purposes:
The next issue being addressed is your friends ability to purchase a home. Chapter 7 bankruptcy is reflected on a credit report for ten years, but that doesn't really mean much when it comes to qualifying for a home loan. Typically, when someone files chapter 7 they are out of bankruptcy within 6 months. there are mortgage programs that allow for financing with only 1 day out of bankruptcy - the loans terms usually aren't great (high rates and prepayment penalties) but if someone wants a loan bad enough they can get one if they meet lender guidelines.
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There are definitely hopes of purchasing a home with little credit history. Lenders can verify credit/payment history other ways, including verification of paid utility bills, etc. I'm not 100% on the bankruptcy question, but I am very sure that bankruptcy will show on the credit report many years after it is discharged. There are many instance where I have seen bankruptcy's on credit reports more than 7 years old.
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The first thing your friend should do is talk with a reputable lender. A reputable lender will be able to evaluate her situation based on all of the details, and this initial evaluation should not cost her anything. If your friend cannot qualify right now, the lender can put her on the right track toward re-building her credit for a future mortgage. You can also tell your friend that a bankruptcy can create problems in obtaining a mortgage typically if its within two years from the discharge, but its not impossible. The important thing is how she has re-established her credit in the interim. Having one or maybe two credit cards that are paid on time is fine, but multiple cards and multiple inquiries on your credit and high balances will lower your score. Lenders can also use alternative credit to determine credit history such as proof that you pay your rent, telephone, car insurance, cable TV, utilit ies, etc. on time. The bankruptcy should be off the report in 7 years or so, but what really matters is the pattern of her credit since the bankruptcy.