There’s no denying that declaring bankruptcy does a doozy on your credit score. For at least a little while, lenders won’t touch you with a ten-foot pole. On the other hand, it provides you with a unique opportunity to start over by virtually clearing the slate where your bad credit is concerned. You might be apprehensive about the fact that a bankruptcy will remain on your credit report for the next several years (as many as ten, although it will likely be removed after seven), but this doesn’t mean you won’t be eligible for loans for that amount of time. In fact, you might even find that lenders encourage you to apply for loans after just a couple of years. Here’s how it works.
In the beginning, you may have to deal with judgments. Not all creditors are simply going to let you walk away Scott-free. Since some debts are not covered by bankruptcy proceedings, you’ll probably find that you still owe some money even though you have declared bankruptcy. In this case, accounts can be cleared and wages garnished until the debt is paid. Or you can simply try to work out a payment plan with those lenders you still owe money to. Either way, it is in your best interest to pay these debts as soon as possible.
Once your debts have been expunged (either through the act of filing bankruptcy or by paying off any remaining debts) you can start to rebuild your credit. You might be surprised to find that successful bankruptcy proceedings will often result in a slew of credit card offers. Of course, you need to be careful to read the fine print. These offers will almost certainly come with very strict caveats. For one thing, your credit limit will be, well, limited, and your interest rates will be higher. In addition, there may be increased penalties for failure to pay, such as a jump in the interest rate or an immediate cancellation of the card. You are a high-risk borrower, but that doesn’t mean these creditors don’t want to take advantage of your newly debt-free status to take a chunk of what money you have.
So, you get a credit card (try to limit yourself to one in order to stay out of hot water for a while) and begin to build up your credit again. Within a year you should begin to see positive results. But you’re going to have to make bigger purchases and get your score up if you eventually want to secure a home loan. So if you can afford it, think about taking out a loan for a car. It doesn’t have to be expensive or new, you just have to qualify for the loan.
Once you have established a pattern of prompt payments on the debt you’ve accrued since filing bankruptcy, hopefully even paying some of it off, you can begin to shop around for a home loan. Lenders will almost certainly be wary of your bankruptcy, but the longer you manage to pay your debts in a timely manner, the less risky you will appear to lenders. Of course, you’ll probably still face difficulties like smaller loan approval amounts and higher interest rates, but if you think that you’re ready to purchase a home, it may be worth these hassles to secure a loan before the bankruptcy has been removed from your credit report.
Leon Edwards writes for Justin Doyle Homes, a custom home builder in Cincinnati since 1976 offering luxurious homes for every lifestyle.
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