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Credit After Bankruptcy


 
 

1. What Is a Credit Report?

 

A credit report is a history of your payments and other financial data. It contains historical in­formation on where you live, how you pay your bills, and whether you’ve been sued, ar­rested, or filed for bankruptcy. Credit reports do not contain information concerning your current or historical income or expenses.       Index

 

Credit reports do not contain a comprehensive list of outstanding debts or all prior pay­ments. Creditors are not legally required to make credit reports. Many creditors do not make credit reports. A credit report only lists creditors that choose to make a report.       Index

A credit report is a history of your payments and other financial data. It contains historical in­formation on where you live, how you pay your bills, and whether you’ve been sued, ar­rested, or filed for bankruptcy. Credit reports do not contain information concerning your current or historical income or expenses.       Index

 

2. Credit Reports, Disposable Income and Credit Worthiness

 

Consumers are trained by the media and credit industry to equate a credit score with credit wor­thi­ness. The two concepts are not the same.       Index

A good credit score is only one factor that determines credit worthiness. It is helpful but not sufficient to establish credit worthiness. A second equally important factor is disposable in­come. A prudent lender will require you to prove that you earn enough money to service both your existing debts and any new loans. You will not be considered worthy of additional cred­it, even if your credit reports show a history of timely payment, if your income is in­suf­ficient to ser­vice your existing debt.       Index

 

3. Credit After Bankruptcy

3.1 Time Limits for Reporting Information. A credit report must exclude the following information:

(a) 10 Year Rule. All bankruptcy information that is more than 10 years old.       Index

(b) 7 1/2 Year Rule. Accounts placed for collection or charged off that are more than 7 1/2 years old. The time period begins to run on the date of the last delinquency (the last missed payment).       Index

 

(c) 7 Year Rule.

 

● Civil suits, civil judgments, and records of arrest more than 7 years old or until the statute of limitations has expired, whichever is longer.

● Paid tax liens more than seven years old.       Index

 

● Any other adverse item of information, other than records of convictions of crimes, which is more than 7 years old.

 

3.2 Required Bankruptcy Information. A credit report that reports bankruptcy informa­tion must include:       Index

 

(a) the chapter under which the case was filed; and

(b) if applicable, a report that the case was dismissed before final judgment.

 

The dismissal of a bankruptcy prior to receipt of a discharge will require a report of both events. It will not result in a removal of all references to the bankruptcy filing from the credit report. 

 

4. Credit Reporting of Debt Discharged In Bankruptcy       Index

Pre-bankruptcy information on a credit report will not be removed after bankruptcy. How­ever, all pre bankruptcy debts should be coded as "discharged" in bankruptcy. A credit re­port may include an account that was discharged in bankruptcy (as well as the bankruptcy itself), as long as it reports a zero balance due to reflect the fact that the consumer is no longer liable for the discharged debt. Dispute the incorrect information with the credit report­ing agency if it does not indicate that the debt was discharged in bankruptcy.

 

5. Effect of Bankruptcy on Credit Availability       Index

Negative history on your credit report is just that: history. It does not doom you to perpetual credit rejection. It does challenge you to strengthen your financial present by saving and us­ing credit carefully.

 

There are two important steps to reestablish good credit after bankruptcy:

 

5.1 Reestablish Positive Repayment History. Reestablish a good post bankruptcy credit history by obtaining a variety of credit sources such as a major credit card, a de­partment store card and/or a gas card. Several companies offer second chance credit immediately after bankruptcy, although they usually have high yearly fees.

Charge small amounts each month. Pay them in full, without exception, every month. Never carry a balance. Timely make all mortgage and car payments every month. Peri­odically obtain copies of your credit report to ensure that the all post bankruptcy infor­mation is accurately reported.       Index

 

Most lenders will tend to use the bankruptcy filing to draw a line in the sand of your credit history; a line between the time before and after bankruptcy. If your credit history before bankruptcy is poor, but the post bankruptcy history is perfect, most lenders evaluating a consumer loan application will tend to ignore the pre-bankruptcy history and rely on the post bankruptcy history.       Index

 

5.2 Debt to Income Ratio. Most all creditors will calculate a "debt to income ratio" to de­termine if you have sufficient income to repay the proposed loan. A "debt to income" ratio (often abbreviated DTI) is the percentage of a consumer's monthly gross income that goes toward paying debts. One calculation of DTI, known as the "back" ratio, indicates the percentage of income that goes toward paying housing costs (including mortgage principal, interest, insurance, taxes and HOA dues) plus all recurring debt payments (in­cluding debts payment due on credit cards, car loans, student loans, child support, ali­mony and legal judgments). Acceptable DTI ratios range between 36 % and 55%, de­pend­ing on the lender.       Index

 

A report of a bankruptcy discharge on you credit report can actually improve your debt to income ratio. It can help make you more credit worthy if:

 

(a) you have sufficient post bankruptcy income to repay the loan; and

 

(b) you have taken proper steps to re-establish a positive post bankruptcy credit rec­ord.

Example: Assume that Billy Bob is a single individual that earns $5,000 gross in­come per month. He applies for a loan to finance a new car loan with payments of $400 per month. He owes $100,000 of credit card debt, with minimum monthly pay­ments of $2,200 per month. He also rents a modest apartment at $850 per month.

Without filing for bankruptcy, Billy Bob’s DIT will be 69% ($3,450 / $5,000). It will be almost impossible to qualify for the loan because the he will not be able to repay the cred­it card debt and also make the car payments.

If Billy Bob obtains a bankruptcy discharge, his DIT will be only 25% ($1,250 / $5,000). All of the credit card debt is eliminated from the DTI calculation because all le­gal liability to repay the credit card debt is eliminated in bankruptcy. He will probably qualify for the car loan, although the credit terms may not be favorable for a few years until he re-establishes a positive post bankruptcy repayment history.

 

6. Free Annual Credit Report

 

The federal Fair Credit Reporting Act requires each of the three nationwide consumer re­porting companies (Equifax, Experian, and Trans Union) must provide consumers with a free copy of their credit report, on request, once every 12 months.       Index

 

Equifax, Experian, and Trans Union have set up one cen­tral website, toll-free tele­phone number, and mailing address through which consumers may order free annual reports. To or­der:

 

Go to the following website: www.annualcreditreport.com;

 

Call 877-322-8228; or

 

Complete the Annual Credit Report Request Form and mail it to: Annual Credit Report Re­quest Service, P.O. Box 105281, Atlanta, GA 30348-5281. The form can be printed from www.ftc.gov/freereports.

 

Do not contact the reporting companies individually. They only provide free annual credit re­ports through using the process described above.       Index

 

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