How Your Credit is Affected

Many people find this hard to believe, but filing bankruptcy may be the best thing you can do for your credit; it can be the beginning of new credit life.
A Common (Mis)belief:
Many people believe that filing bankruptcy will end any chance of getting any type of credit for many years. This is not the case. This belief is generally the result of the enormous amount of misinformation, lack of information and fear among people about bankruptcy, much of which is put forward by bill collectors and businesses who spread this in an effort to serve their own interests.

For instance, you may have a bill collector telephoning you at home or work and saying (threatening), "you'll never get credit again if you don't pay this bill", or you may see debt management programs advertise that their program "will avoid the extreme of bankruptcy".

My experience is that these bill collectors, debt programs and loan companies will say almost anything, no matter how outrageous or untrue, because they either want you to pay a bill, sign up for a so-called "non-profit" debt management program (how do they pay for all those television commercials!) that have no guarantees or clear end point, or apply for a loan you can't afford and, no doubt, pay them a very high interest rate or fee in the process.

The Reality:
Let's look at the situation in its true light and take the road to good credit. If you are behind in payments or can't continue to make payments on a loan or credit card, your credit record is negatively marked and will remain so for at least six years. You are also at risk of your creditors seeking to garnish your wages, seize your bank accounts or take other action to satisfy your debt.

Or you may realize that while you have been able to pay the monthly fees and interest charges on your debts, you have little hope of ever paying off the principal amounts due and you may, quite literally, be paying on them for the rest of your life or some large part thereof. I have calculated in many, many cases that people are often working one week per month to just earn enough money to pay their monthly interest charges! It is often worse then that!

If you are in a situation like this, filing bankruptcy may be the only way and the best way to re-establish yourself and your credit. It will eliminate much or all of your debts, allow you to put your financial house in order in a short amount of time and protect all your property.

You probably realize that if you don't eliminate these debts, you will likely continue in a debt cellar with poor credit and little hope of eliminating unpayable bills while you continue to incur, in most cases, steep monthly interest charges and fees that make the situation even worse.

A New Day:
Countless number of clients of mine have obtained home mortgages, car loans and other types of credit immediately after their bankruptcy, because through bankruptcy they have eliminated much or all of their debts and they are now relatively "debt-free".

I have spoken to many credit managers and they all agree that they will give a loan to a person who has filed bankruptcy, if they show their expenses are under control. They will not give a loan to a person with a lot of debt or with bills or debts they cannot pay because, quite simply, they are at high risk of defaulting on any new loan or credit account.

Now, let's get to the basics of getting and keeping a good credit rating once you file bankruptcy. Some of this is just good common sense, but with a point:

Step #1: Pay your bills consistently and on time. Then keep a record of timely payments for later reference with credit lenders. In particular, make sure you pay any mortgages, car loans and utilities on time.

Step #2: Reality check. Are you spending money every month on things you don't need. Buy an accounting notebook at your local drugstore and enter into it every item you spend money on for a full month. At the end of the month, analyze every expense. For example, do you really need premium cable channels or both a home phone and cell phone. Are your utilities in check or are you heating your house when nobody's home or heating rooms when not in use. You may be surprised on how much you can save.

Step #3: Establish a savings account and put a little in there each month. This is not as tough as it seems. Add up how much you were paying each month on debts that have now been eliminated in bankruptcy. Now that you no longer have to pay these debts, write a check to yourself for half this amount and put it directly in a savings account. This will serve many purposes. It signals to potential creditors that you are managing your finances smartly, that you have sufficient income relative to expenses and you have a reserve or cushion for future obligations such as theirs. No matter what comes your way, don't touch this money. This will lift your credit boat immensely.

Step #4: Keep one credit card, if you can, when you file bankruptcy. If you file bankruptcy and you have a credit card or line of credit that does not have an outstanding balance, that creditor is not listed on your bankruptcy petition. The creditor doesn't know you have filed and generally you can keep this card or account. Use this account responsibly, accrue only a balance that you can pay promptly. This will be reflected positively on your credit report.

Step #5: Obtain a secured credit card. Call one or more of our local banks and ask about a secured credit card. A secured credit card acts like a regular credit card, except that you deposit money as collateral for your credit line rather than having the bank extend you credit. The money is yours and its deposited in a savings account for you. Your line of credit is as high as the amount on deposit. After a year, the bank should give you back your secured deposit.

The benefit of this card is that these transactions will appear on your credit report. So pay any accruals promptly. BEWARE of companies that send you a postcard or telephone you with an offer of a secured card. Suffice to say, they are frauds, trying to sell goods at inflated prices.

Step #6: Apply for unsecured credit. Often you can obtain an unsecured credit card from a local gasoline retailer or department store, such as Mobil or Sears, particularly if you are employed or you have a co-signer (e.g. parent, spouse, relative). They will usually open your account with a very low credit line. Only charge what you can pay off each month.

Step #7: Get or keep a steady job. A steady job is the biggest boost to good credit. It spells stability to creditors and allows you to start saving; and it serves as a basis to extend a needed loan to you.