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Rebuilding Your Credit After Bankruptcy

A common question that we receive from clients at Leiden & Leiden in Augusta, GA, is what will be the best way for a consumer to rebuild their credit after a bankruptcy filing.  Obviously the bankruptcy will affect the credit score, but its overall effect may be minimal, as most of the damage to the credit score occurred prior to the filing of bankruptcy.  Lawsuits, garnishments, foreclosures and repossessions  – the usual catalysts for a bankruptcy filing – will have a catastrophic effect on your credit score.  But regardless of whether the credit rating was impaired by pre- or post-bankruptcy causes, the goal of rehabilitating your credit is an essential part of the recovery process.

While the bankruptcy filing will be listed as a public record for up to 10 years, that does not mean that the consumer is barred from obtaining credit for that time period.  However, patience will be the key to establishing a responsible pattern of financial activity that future lenders can evaluate.  Resist the urge to immediately borrow money with the goal of paying it back.  Lenders may consider this to be reckless rather than responsible behavior.  Instead, concentrate on saving money. The more money that you can pay down for an auto or home loan means the less money that you have to borrow.  As a result, the risk of default for the lender decreases because there will be an equity position in the collateral.  The more that you can reduce the lender’s perceived risk, the more likely it will be that you will be approved for a loan with a competitive interest rate.  To further enhance the likelihood of approval, keep the money in a savings account with the bank or credit union from whom you seek to borrow.  In this manner, the lender can immediately verify the amount and availability of the funds to be used for a down payment.

Also keep in mind that the amount and stability of your income will be key factors in a future loan application.  An individual who is self-employed is always going to encounter more difficulty in applying for loans since the income is difficult to verify, and may be prone to periodic fluctuations.  On the other hand, a borrower with less monthly income that has secure employment with a government agency – such as law enforcement or education – may be a better credit risk because those jobs cannot be outsourced or shut-down.  Regardless of the nature of your employment, retain your financial records such as bank statements, pay stubs and income tax returns, as future lenders will require this information.  If your employment history has been spotty, or if there are gaps in your wage income, be prepared to explain this to a loan officer.  Finally, be reasonable in your loan request and make sure that the proposed loan payment will comfortably fit into your budget.

Once the loan is obtained, make the payments on a regular basis.  Setting up a recurring bank draft will ensure the timeliness of the payments, and may offer additional incentive for a lender to provide the loan.  Set aside money as available (from a tax refund for instance) to make the payments in the event of a sudden income loss, such as illness or unemployment.  In this manner, you can begin to rebuild your credit in a responsible manner, and hopefully protect yourself from the necessity of another bankruptcy in the future.