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Has Debt Taken
Over Your Life?

Rebuilding credit after bankruptcy

A Chapter 7 bankruptcy can liquidate debt and provide a financial fresh start. But this may come with worries that decent credit may never be reestablished after bankruptcy. There are ways, however, to rebuild credit.

First, keep in mind that your credit may have already been in the cellar if you were eligible to file for bankruptcy and not because of the bankruptcy filing. Most likely, it was in the mid-500s.

Getting started

It is important to demonstrate to lenders that you have enough money to pay off your current commitments with having a little cash left over. Smaller debt makes you more attractive to lenders. They are less worried that you will refile for bankruptcy because you are ineligible to receive another debt discharge for eight years.

Creating a budget helps with staying current with your finances. An emergency fund for unexpected expenses, even as low as $250, can help prevent new uncontrollable debt by seeking payday loans or overusing credit cards.

Planning for post-bankruptcy

After bankruptcy, you need to develop a strong credit score. First, review free annual credit reports to determine your financial situation. Because credit scores are calculated from information in these reports, you must dispute and correct any false information.

Keep in mind that a bankruptcy report will remain on credit reports for up to 10 years, but its effect will diminish as time goes by. You can help accelerate this by placing more positive information on your credit report.  Late payments and debts sent to collection, however, stay on reports for seven years after any delinquencies.

Getting the right loan product

Debtors need to get a loan product that provides assurances that they will not lose the money lent to you. There are four ways to improve your financial profile, obtain credit and restore a better credit score.

With any of these options, however it is essential that you make timely payments. Balances should be kept low, 10 to 30 percent, compared to loan limits. Late payments and unreasonable loan balances can put you back in a credit hole again.

A secured loan is usually offered by credit unions or community banks. The first type of secured loan is borrowing against money that you have on deposit with the lender which remains inaccessible when you pay off the loan. The second loan is made without upfront cash where the loan funds are placed in a savings account and released only after you make the necessary payments. The lender, however, will send a report about the payment history to credit bureaus.

A secured credit card is backed by a deposit that you pay, and the credit limit is usually the amount on deposit. These typically have annual fees and high interest rates. Secured credit cards are recommended for a short period until you can obtain a better card.

These cards must be used infrequently and timely paid off. Carefully investigate these cards because you should have a strong chance for approval and any credit inquiry can cause a small and short-term drop in your credit score.

A co-signed credit card or loan is a more difficult option. It requires a family member or friend with a good credit history to co-sign your loan. If you do not pay, they may have to pay off your debt in full, have restrictions placed on their own credit and put their credit history at risk. Your failure to pay can also end a personal relationship.

You can also ask a person to allow you to be an authorized user on their credit card. This is the most helpful for someone who has little credit information in their file. This has less advantages, however, because authorized users are not ultimately responsible for paying off the card. It will not build up your score unless the credit card company reports payment activity.

An experienced attorney can help deal with insurmountable debt and choose the bankruptcy options, such as Chapter 7 or Chapter 13, that meet specific needs. They can also help assure that all legal requirements are met for filings.

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