Can filing for Bankruptcy Improve My Credit Score?
By Stuart R. Simone, Esq.
Most people considering filing for bankruptcy are of course concerned about how bankruptcy would affect their credit score, and how quickly they can rebuild their credit after filing.
Bankruptcy has got a bad rap over the years, but for those who have filed, it’s all good. Just ask Donald Trump, who has been in bankruptcy court four times and went to become a Billionaire and President of the most powerful country in the world. Our founding fathers who drafted the Constitution of the United States made sure that American Citizens had the right to a “financial do-over.” That financial safety net gave many entrepreneurs the confidence to take more risks with their businesses, and it’s safe to say that America would not be the #1 economic and financial power on the planet without our right to file bankruptcy. So despite what you’ve heard from “the naysayers,” it’s nothing to be ashamed or afraid of. Just learn more about Bankruptcy, and decide for yourself if it is a financial tool that you want to use. Here are some surprising facts:
- Filing for bankruptcy may help your credit score! It’s often better to file for a bankruptcy than to continue to struggle with more debt than you can handle. Your score will probably dip immediately after the filing, but if your score is already low it won’t dip much, and very soon it will probably start rising. Researchers at the Federal Reserve Bank of Philadelphia found scores typically fell in the 18 months before people filed for bankruptcy and rose steadily after filing. The average credit score before filing was 538.2 and by the time the bankruptcy was discharged – it takes only a few months in a Chapter 7 – the average rose to 620.3.
- You can get a new home mortgage loan much sooner than you think! The Federal Housing Administration (FHA) will insure a mortgage after only one year of payments in a Chapter 13 bankruptcy and only two years after a Chapter 7 discharge if the Chapter 13 payments were made on time and you have now have a stable job. The FHA will consider insuring a mortgage even sooner if extenuating circumstances are shown. Fannie Mae will consider buying mortgages two years after a Chapter 13 discharge and 2-4 years after a Chapter 7 discharge.
- People who file for bankruptcy report getting many credit card offers shortly after receiving their bankruptcy discharge. This is great news, because you can quickly re-build your credit. Always keep in mind the two most important factors for creating a good credit score: (1) Make your payments on time (= 35% of your FICO score), and (2) Use as little of your available credit as possible (30% of your FICO score). Regarding the latter, here’s a tip for eveybody: Call your credit Card company and have them increase your credit limit; if they do, your score will instantly improve!
- You can continue rebuilding your credit core with a “Credit-Builder Loan” from your local credit union. These loans put the money you borrow – usually in the $500 to $1,000 range – into a certificate of deposit or savings account that you can claim once you’ve made 12 monthly payments. Your payments are reported to the credit bureaus, so you can build a decent credit history and save money at the same time.
- Another alternative is using cdfifund.gov to find a local community development institution that offers Credit-Builder Loans.
- SelfLender is a private service that also offers these types of loans. This is a private company and we offer no endorsements, but we do like their website, which offers a lot of useful financial information, such as Resources > How Credit Works.
- You can accelerate you credit score’s rehabilitation with a secured credit card. You make a deposit, typically $200 to $2,000, with the issuing bank and get a credit line equal to that deposit. You should use the card regularly, but make sure you pay the balance in full every month, and don’t charge more than about 30% of its credit limit.
- If and when your score reaches the mid-600s, you can apply for a regular credit card. Get as high a limit as possible – after a few months you can call in and have your limit raised – as the higher limit means your balance % will be lower – again, 30% or lower is preferred – and this will help your credit score.
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