Fixing Your Credit After a Bankruptcy to Apply for a Mortgage

When I first started working with Charlie (not his real name) in 2005, his bankruptcy had just been discharged, meaning his remaining debt was cleared. His credit score was 526, and he didn't think he had a chance to even get a credit card.

Charlie's bankruptcy filing was needed after a difficult divorce and a medical emergency. In fact, a a majority of people who seek bankruptcy protection do so after a medical emergency, difficult divorce, job loss; or some combination of the three.

It didn't take long for him to realize that his financial life was not over. Within a couple of months, he'd gotten more than a dozen credit card and other loan offers. After the discharge of a Chapter 7 bankruptcy, you're considered an even better risk than someone who still has a mountain of debt because you can't file for bankruptcy for at least eight years. In reality, you can get a credit card immediately after your bankruptcy discharge.

Many people think, That's exactly what got me into trouble in the first place, so I'm going to avoid plastic in my life forever. That's a huge mistake if you want to buy a house. You need to rebuild your credit score, and the best way to do that is to show that you can manage credit wisely. A credit card history that shows you can pay your bills on-time every month is one of the best ways to rebuild that history.
With my help, Charlie's credit score was back to 646 in about 2½ years, which is enough to qualify for an FHA and VA loan even in today's rough mortgage marketplace. When we checked his score in January 2011 it was back up to 727; now he can qualify for some of the best interest rates.

The key is to work on three pieces of the puzzle at the same time immediately after the bankruptcy: Clean up your credit report, begin rebuilding a positive credit history and start saving. Now that you don't have credit bills to pay any more, start putting as much of that money aside as you can to save toward the downpayment on your next home. The more money you can put down, the better you will look to a mortgage banker.

Fix Your Credit Report

The last thing you probably want to do after a bankruptcy is to review your credit report and see all the damage that you did. Get over it. The quicker you clean up that report, the faster you will be able to improve your credit score. You can get a credit report for free from each of the credit reporting agencies at AnnualCreditReport.com. By federal law you are entitled to one free report each year.

When you get that report, review it and note any errors you see on the report. For example, you may find accounts that are not yours or lenders who reported late payments that are not accurate. The credit reporting agency will send you instructions about how to make corrections. Follow those instructions carefully and make your corrections. Send any proof you have that the account reported is incorrect. The credit reporting agencies tend to believe your creditors rather than you, so the more proof you can send the better.

In addition to making corrections, also inform the credit reporting agency of your bankruptcy and note any accounts on that report that were discharged by the bankruptcy. The credit report agency will then note the bankruptcy, and that will start the clock for the debt to be removed from your credit history. Most negative credit accounts can stay on your report for seven years from the last date of activity. A Chapter 7 bankruptcy stays on your credit report for ten years.

But as a negative mark ages on your credit report its impact on your credit score becomes less and less significant, which is why you can rebuild your credit score even before the bankruptcy drops off.

You may find that you have to go through the correction process several times. Each time the credit reporting agency fixes a report, they will send you a corrected copy. Check it again for any errors and report any remaining errors until your credit report is accurate and all your discharged accounts are noted.

Rebuild Your Credit History

While you're working with the credit reporting agencies to clean up your credit report, you should also be working on rebuilding your credit history by opening one or two credit accounts to begin positive reporting on your credit report. Each time you pay a bill on time that will be a positive mark and will help to minimize the negative marks.

You'll likely have to start with a secured credit card. These cards usually require an annual fee and charge higher interest rates. While they're not the best deal out there, they may be your only choice right after a bankruptcy. After about six to 12 months of using a secured credit card on time, you should be able to get an unsecured card with better terms.

You also may be able to get a retail credit card. Don't go overboard with getting new credit now that you can. Stick to one or two credit accounts to show you can use credit wisely and pay it on time.

Monitor Your Credit Score

As you're rebuilding your credit score, you may want to monitor your progress. If your score continues to go up, you're on the right track. But if you find that your score goes down in any quarter, think about your credit activities. Did you charge a large item? Did you open a new account? That way you'll learn what does positively and negatively impact your credit score so you can be sure you have the best score before applying for that mortgage in the future.

Six months before applying for a mortgage, don't take on any new debt and risk ruining all the work you did to rebuild your credit score. Keep your credit accounts active but your balances low to get the best credit score.

Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Personal Bankruptcy and The Complete Idiot's Guide to Improving Your Credit Score.

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Duane

BK's are the best thing since Corn Flakes. They force you to do business with "cash on the barrel head". Learn to do that, and credit becomes a tool and not a crutch. Lenders hate BK's because it deprives them of interrest. They could care less about the principle, it's just an instrument to charge interrest.

March 08 2011 at 2:48 AM Report abuse rate up rate down Reply
Saavy

Look up the FDCPA. You do have rights aa consumer and you can sue them.

March 08 2011 at 2:01 AM Report abuse rate up rate down Reply
new advice

I recently read of an experience of someone who had very successfully rebuilt his credit score in record time after filing bankruptcy. His method was to go to a local credit union or small bank and take out a secured loan....in other words he would deposit $800 and take out a secured loan for $700, he paid the loan back, making a record of him borrowing and paying. He did this repeatedly, increasing the amount each time, this brought up his scores by the hundreds within a short amount of time. This is a safer option than resorting to credit cards to build your credit.

March 07 2011 at 10:33 PM Report abuse rate up rate down Reply
Brian

Let me ask this, aren't debt collectors held to ANY standard. I mean REALLY held to one. the reason i ask is i was told that they cannot report they have talked to you if they haven;t however they play games and leave mssgs. on phns and say "if you don't hang up now we assume you are "so in so" otherwise hang up now" well if it's a machine that's a "plus" for them. I went through a rough struggle between medical issues as well as an ex gf who thought that charge cards were free apparently. anyway i could not pay any longer and one day just stopped. stopped paying and stopped talking. since then it has been 7 yrs already and yet these debts all come up as though im talking to them daily???? If i had the money to pay up i would but i do not nor do i have the assets anymore to do so. What do i do?? do i now have to come up with money and file BK just to actually get the stuff off my record?? I still am young enough to want to get a mortgage at some point.

March 07 2011 at 10:00 PM Report abuse rate up rate down Reply
Neuticles

The credit card companies raised my cards to 28 to 34% a year ago for no reason- never late. i called them and said either lower my interest of ill stop paying. they didn't so i stopped paying. six months later and 1000 collection calls later ( get caller ID to track them and dont answer) they offered "settlements" Most were .25 cents on the dollar. I paid them off and saved thousands. The money I used to spend on credit cards went into saving and I have cash now when I need to buy something and use my debit cards. I WILL NO LONGER BE AN ENDENTURED SERVENT TO CREDIT CARD COMPANIES and never- EVER- want a credit card again.

March 07 2011 at 9:43 PM Report abuse rate up rate down Reply
Kevin Rowlands

how about we go back to doing it the way our grandparents did it. If you did not have the money to buy it outright, you did not get it. If you really wanted something, you had to SAVE YOUR MONEY. if you pay cash fpor everything you do not need a credit score (FICA score) AKA a how much debt do i have score. LONG LIVE DAVE RAMSEY AND HIS IDEALS

March 07 2011 at 9:41 PM Report abuse rate up rate down Reply
Dirty Harry

I filed chapter 13 where I am paying off my debts under court supervison. At first I felt really bad about it. But then I came to realize companies do it and they aren't frowned upon. Especially when these big companies get taxpayer bailouts. I bailed myself out. After, the bankruptcy is completed and dismissed it will be cash only and I will use a portion of my 401K to pay off my house and retire (debt free.

March 07 2011 at 9:22 PM Report abuse rate up rate down Reply
Vimala

People who file bankruptcy are irresponsible dishonest people who took goods and services from honest hard-working merchants and people. Who do you think is paying for their "discharged" credit card bills and other unpaid bills? Us decent responsible people! "Fresh start" for these jerks who live beyond their means? They don't deserve it. 7 years later they get to do it all over again to defraud more merchants and people. I am a merchant and a defrauded creditor. I struggle and live within my means while those bankrupt people going around living the good life without paying. That lost $24,000 in 2009 a "client" discharged against me really hurt me deeply. Credit score 526 after a bankruptcy discharge? You've got to be kidding. It should be 0. Bankruptcy is nothing more than government sponsored "theft", an administrative procedure for debtors with no rights for creditors. No wonder America is in such a mess and going down hill to hell in a hurry. I say CREDITORS UNITE! Where are our rights? We need a new revolution.

March 07 2011 at 9:18 PM Report abuse rate up rate down Reply
2 replies to Vimala's comment
sketchy

See comment to Roger. If you still think that classifies as theft you are a truly unique individual.

March 07 2011 at 9:35 PM Report abuse rate up rate down Reply
DLee4144

I agree with you that it is dishonest to fail to pay a small businessman. I made sure that the actual people I had contracted with were paid in full. But, I have no guilt at all about stiffing the big credit card companies. They raised my rates by about 25 percentage points. As far as I'm concerned, when they change the rules in middle of the game, I'm not obligated to continue to play.

March 08 2011 at 3:47 AM Report abuse rate up rate down Reply
Mary

My husband and I filed bankruptcy some years ago and were working credit counselling services who told us to get credit cards to rebuild our credit. Long story, short....I got really sick and we fell right back into the same rut....now, that same credit counselling company that was working with us to rebuild our credit, then started working with us to pay back all of the debt we incurred with the cards(lower interest and pay them back in smaller payments), and now they recommended after being in the program to repay the cards for the last 6 months, that we should now let them try to settle the repayment back to the card company's. The interest and pile up on the accounts has grown so much since we turned them over to them, that i feel we have no choice but to continue to work with them. It has got totally out of control and I feel I have let my family down, letting this happen again. I wish I could find a solution to get us out of this and rebuild our credit. The credit cards are long gone! If anyone would care to share any suggestions, I'd be more than grateful and appreciative.

March 07 2011 at 8:33 PM Report abuse rate up rate down Reply
Debby

You can get a secured credit card by supplying a deposit with the credit card company. That $ amount will be your limit & will not be available to you if you fail to pay back the amount you charge on your "deposit" each month. It may be difficult to come up with a large amount to deposit after bankruptcy, but it is an excellent way to build credit after filing for protection.

March 07 2011 at 8:11 PM Report abuse rate up rate down Reply