Credit can mean many things. When we talk about hurting our credit in bankruptcy we are generally referring to our ability or inability to borrow money. When a bank is trying to decide whether to loan money or extend credit to someone, they will usually look at a credit report or the credit score for the individual who is asking for the loan.
Credit reports and scores
The credit report that the lender uses is compiled by one or more credit reporting agencies. While there are a number of credit reporting agencies out there, the big three are Experian, Equifax and TransUnion. Another well known credit reporting company is FICO (Fair Issac Corporation). FICO uses the information from the credit files of the big three national bureaus to generate a credit score known as your FICO® score. A higher number indicates that the individual is a better credit risk. In other words, the individual with a higher score is more likely to pay the loan back and do so in a timely manner. A lower number indicates more risk that the lender may not be paid on time or get paid at all. Many lenders rely on a FICO score in their decisions to grant or deny credit to consumers.
What information is in my credit reports?
These credit reporting companies gather credit information about you and sell it to those who are authorized to use that information. Authorized users may include, but are not limited to, those who are considering lending you money or those who are trying to collect money owed by you. Credit reports contain a history of your debts and their repayment by you. The report is a compilation of information gathered from banks, collection agencies and governmental entities. Your report will contain certain identifying information about you such as your date of birth and your social security number. The report also contains your past and current home addresses, phone numbers and information about your current and past employment. The bulk of the information in a credit report will typically include your current and past debts and the payment history of those debts. Your report may also contain information about lawsuits and judgments against you. There will also be a record of others who have requested your credit report and those that have actually been provided copies of your report.
Bankruptcy’s effect on your credit
Most who are thinking about filing for bankruptcy protection are already experiencing the types of events that damage a credit report or score. For most, credit history and scores already reflect negative payment history, defaults and high levels of utilized debt. Contrary to what many creditors would lead you to believe, filing bankruptcy will actually improve the credit of most individuals by wiping out large amounts of delinquent debt. In fact, research findings from a Staff Report for the Federal Reserve Bank of New York show an immediate and significant improvement in the credit scores of individuals who recently filed bankruptcy. This improvement in credit scores was compared with individuals who were insolvent but chose not to file bankruptcy. The credit scores of those who chose not to file bankruptcy remained stubbornly low and well below the scores of those who chose to file for bankruptcy protection. Since a large part of your credit rating is based on payment history, getting a fresh financial start from bankruptcy can actually help you get away from missed and delinquent payment and to start rebuilding a history of regular and timely payments.
Credit counseling is a requirement of the bankruptcy process
Unless you are in the military on active duty you will need to go through credit counseling before you can even file for bankruptcy protection. This counseling must be done with a non-profit counseling agency that has been approved by the Court in the district where you plan to file. The agency will help you explore to see if there are alternative ways to deal with your debts without filing for bankruptcy.
More counseling is required before the Court will discharge your debts
Later in the bankruptcy process and before any of your debts are discharged, most filers are required to undergo financial management counseling known as debtor education. This counseling must also be done through an agency approved of by the Court. The goal of this counseling is provide education about financial choices that may reduce the likelihood of a need for bankruptcy protection in the future. This education includes budgeting, money management, wise credit use, consumer protection laws and how to deal with unexpected financial emergencies. A certificate of completion must be filed with the bankruptcy court before you can receive a discharge of your debts. Consequently, the type of advice given during the counseling is of the type, that when followed, can help rebuild credit faster.
Your credit report after bankruptcy
Within thirty to sixty days after discharge you should obtain a copy of your credit report and check it for mistakes. Be on the lookout for unfamiliar creditors or debts. It is possible that your report will incorrectly show balances for debts that were bought and sold by collection agencies, but that are now discharged. After a bankruptcy your credit report should list all debts discharged as having a zero balance reflecting that you no longer owe anything on the debt. Each discharged debt should also indicate something to the effect that it was discharged in bankruptcy. A creditor should not report that a discharged debt is currently active or that a balance is due. Creditors also should not indicate that a debt was “charged off” when in fact it was discharged in bankruptcy. Debts incorrectly reported will unnecessarily hurt your credit rating making it more difficult and costly for you to obtain credit in the future. You should also be on the lookout for accounts where you have or had a good payment history that are not included on your credit report. This might include an older debt that you always paid on time and fully paid off before you even started thinking about bankruptcy.
How long does bankruptcy stay on credit report?
A bankruptcy filing can be reported by the credit agencies for a period of ten years from the date of filing. Compare this to late payments which may remain on your credit report for seven years from the date of the last activity on the debt.
Rebuilding credit after a bankruptcy
It is not surprising that many of the things that can be done to rebuild credit after a bankruptcy are the same things that those who have never filed for bankruptcy use to build credit. One of the first steps to better credit is regularly checking your credit report for errors.
How to get a free copy of your credit report
Once a year, you can obtain a free copy of your credit report from the Annual Credit Report Service, www.annualcreditreport.com, P.O. Box 105283, Atlanta, GA 30348-5283. If you use the annual credit report service you will not be charged for these reports, whereas, if you contact the reporting agencies directly they will require you to pay for your report. You can request one free copy of your report from the Annual Credit Reporting Service once every 12 months from each of the three main credit reporting companies. For this reason, I suggest that your report from only one of these companies at a time. That way you can then review the report, take any corrective action that you need to and then request a report from one of the other credit reporting companies to see if the information was corrected. Even if all the information is correct, requesting the reports one at a time, gives you more opportunity to check your credit reports at intervals throughout the year. (i.e. you might order a report from one of the agencies every four months)
Other situations where you can get a free credit report
According to the Federal Trade Commission, you are also entitled to a free copy of your report “if a company takes adverse action against you, such as denying your application for credit, insurance or employment, and you ask for the report within 60 days of receiving notice of the action. The notice will give you the name, address, and phone number of the credit reporting company. You’re also entitled to one free report a year if you’re unemployed and plan to look for a job within 60 days; if you’re on welfare; or if your report is inaccurate because of fraud, including identity theft.”
What if mistakes on my credit report are not corrected?
Credit reporting is governed by the Fair Credit Reporting Act (FCRA). If there is incorrect information on your credit report, you should directly send written notification to the reporting agency that has made the error in your credit report. The FCRA is designed to stop credit reporting agencies from spreading false information about you and your credit. When requesting a copy of your credit report to verify that false information has been reported, a good practice is send your letter by certified mail return receipt requested. Keep a copy of the green card you get back with a copy of the letter you sent. If the reporting agency that made the error does not correct the errors after you have directly notified them, you may have an action against them for damages. If you prevail in such an action they may also be responsible for the payment of the fees for your attorney to bring a claim under the Fair Credit Reporting Act. A willful refusal to report your debt as discharged in bankruptcy in an effort to get you to pay it is also violation of the bankruptcy discharge protections and may entitle you to additional relief.
Getting loans after bankruptcy
Creditors looking at your finances after bankruptcy will be able to consider the fact that a large part, if not all of your debt now has a reduced or zero balance. Because the total amount owed has gone down you should have a better ability to pay back any new debt. Assuming your income stays about the same, your debt to income ratio will improve. This is a measure lenders often use to measure your ability to repay. Some potential creditors may also look at your bankruptcy as an assurance that you will not be able to file for bankruptcy again for a number of years.
Credit after bankruptcy
To help build back your credit after bankruptcy, make sure that you pay all bills on time. You can begin to build your credit back by staying absolutely current on payments to any debts you may have reaffirmed such as a mortgage or car payment. Staying on top of bills for utilities, rent or anything else for that matter will also begin to rebuild your credit.
Repair credit with deposit accounts
Another way to build credit is to open a deposit account such as a checking, savings or money market account. Lenders generally look at deposit accounts as a sign of financial stability. If you open a checking account be sure to keep up with it regularly. Bouncing checks in your new account will do the opposite of building credit and can result in bank charges, fines and even criminal prosecution.
Credit cards used wisely can begin to repair credit
If you were able to hang on to a credit card through bankruptcy or have obtained one since, be sure to keep the purchases small and manageable and pay them on time and in full. Paying for small regular purchases made every month or two can quickly help build back credit by showing a steady disciplined use of credit.
To discuss how bankruptcy may or may not apply to your specific situation please feel free to contact me. To schedule an initial free and confidential consultation call 601-853-9966.