Credit after Filing a Chapter 7 Bankruptcy: how individuals can improve their credit score after a Chapter 7 bankruptcy.


 
   According to the American Bankruptcy Institute, there were 18,466
non-business Chapter 7 bankruptcy claims filed in the state of Illinois
last year.[1] Even though this amount is nearly three times as less as
the amount of Chapter 7 claims filed in 2005, analysts at the Federal
Reserve indicate that household debt is at a record high relative to
disposable income for 2007.[2] Consequently, some analysts are
concerned that the high level of indebtedness will lead to more
bankruptcies in 2007.[3] Nonetheless, filing for a Chapter 7 bankruptcy
is not the end of the world for one’s credit.

I. Introduction

     According to the American Bankruptcy Institute, there were
18,466 non-business Chapter 7 bankruptcy claims filed in the state of
Illinois last year.[1] Even though this amount is nearly three times as
less as the amount of Chapter 7 claims filed in 2005, analysts at the
Federal Reserve indicate that household debt is at a record high
relative to disposable income for 2007.[2] Consequently, some analysts
are concerned that the high level of indebtedness will lead to more
bankruptcies in 2007.[3] Nonetheless, filing for a Chapter 7 bankruptcy
is not the end of the world for one’s credit. As this has become a
billion dollar industry, authors and attorneys alike have come together
to provide their expertise on how a debtor should file for
bankruptcy.[4]

     At the end of the bankruptcy process, when all of the debts
have been discharged, it is up to the debtor to build back his or her
credit. What happens to the debtor’s credit score after bankruptcy
greatly depends on what his or her credit score was prior to filing for
bankruptcy, as well as how many accounts were included in the
bankruptcy.[5] In an article published just this year, Aleksandra
Todorova, a columnist for Smartmoney.com, stated that “[i]n many cases,
the damage done to [one's] credit score isn't nearly as bad as
expected. Over the long run, obtaining a score high enough to make
[one] eligible for very competitive rates isn't out of the
question.”[6] Furthermore, when an individual files for bankruptcy, his
or her credit score thereafter is compared with other individuals who
have also filed for bankruptcy.[7] As explained by Graig Watts, a
spokesman for Fair Issac, a debtor’s credit report will not “run the
gamut” against individuals with perfect reports but rather with
individuals that have also filed for bankruptcy; thus creating a more
level playing field for recent debtors to rebuild their credit.[8]

II. How Can a Debtor Rebuild His or Her Credit?

     There is no magical formula on how to rebuild an individual’s
credit after a bankruptcy, but there are several ways a debtor can get
back on the credit track. Here is a list of five painless steps that a
debtor can take to begin the mending process.

A. Save Your Paperwork

     While going through the Chapter 7 bankruptcy process, make a
folder of all relevant court documents such as Petitions, Matrices,
Motions, Schedules, and Orders.[9] Most importantly, the debtor should
make sure that he or she has a copy of the Discharge Order. “A
bankruptcy discharge releases the debtor from personal liability for
certain specified types of debts. In other words, the debtor is no
longer legally required to pay any debts that are discharged.”[10] The
debtor can obtain a copy by contacting the clerk of the bankruptcy
court that entered the order; however, charges do apply.[11] If the
debtor loses the order or does not have a copy of a pertinent document,
he or she should not hesitate to request one from the court. It is
easier to request a copy for a document shortly after a bankruptcy
rather than a couple years down the line. Once compiled, put the folder
away for safe keeping; who knows when the debtor will need to refer
back to it.

B. Request a Copy of your Credit Report

     The debtor should wait a month or two after
the Discharge Order before he or she requests a copy of his or her
credit report, therefore allowing enough time for all of the creditors
to adjust their accounts accordingly. There are several agencies where
an individual can obtain a copy of their credit report. However, under
federal law, one can obtain a free copy of a credit report once a year
from each of the following repositories: Trans Union (800-888-4213),
Equifax (800-685-1111), and Experian (888-397-3742).[12]

     Once a debtor receives the credit report, he or she should make
sure all the accounts that were discharged in the bankruptcy show a
balance of zero.[13] There should be no comment indicating a past due
account after the date of the bankruptcy. “If there is a written
comment about bankruptcy on any creditor entry, it should show that the
debt was included in a Chapter 7 Bankruptcy.”[14] If any information is
inaccurate or if a creditor continues to report an account as past due,
the debtor should notify the credit repository as soon as possible.[15]
That individual can also try to contact the creditor directly and
report the problem.

     A Chapter 7 bankruptcy can remain on a credit report for up to
ten years from the date of filing.[16] Ms. Todorova, in Understanding
the Bankruptcy Rules, further advises that there is no harm in
contacting the creditors at some point to see if they will discontinue
reporting the discharged account to the credit bureaus.[17] If the
debtor is fortunate enough to remove a couple accounts from the credit
report, one’s credit score should increase.[18]

C. Create a Budget

     After filing for Chapter 7, it is important that the debtor
calculate his or her income in comparison to his or her expenditures.
If the debtor must use credit, that individual should know what he or
she can actually and comfortably “afford to pay for purchases with the
income [he or she] [has], and limit the borrowing to that amount.”[19]
Making a realistic list of expenses and allocating funds accordingly is
a great way to ensure one does not overspend.[20] The debtor should be
sure to add in car payments, house payments, and any utilities costs.
Paying these expenses on a timely month-to-month basis is a quick way
to demonstrate to future creditors that an individual is serious about
their credit.

D. Open a Checking Account or a Savings Account

     Opening a checking account as well as a savings account is
another way the debtor can improve his or her score.[21] The debtor
should continue to make regular deposits regardless of the amount.[22]
The main focus of having one of these accounts is to save money. By
placing money aside, the debtor can create a safety net for the
unexpected. “One of the most important things that a person emerging
from bankruptcy can do is to make a serious effort to build that
emergency fund.”[23] Whether it is a new tire or a utility bill, the
last thing a person coming out from bankruptcy needs to do is rely on
credit for emergencies. The debtor should continue to make a deposit
with every paycheck that is received.

E. Get a New Credit Card or a Secured Credit Card

     Although a credit card might be the reason an individual fell
into this mess, obtaining a new card, credit or secured, can help get
that person out. If the debtor is able to get a credit card, he or she
should make very minimal purchases on it and pay it back that month. At
first the debtor should only spend ten to fifteen percent of the credit
card’s limit. Then once the debtor has consecutively paid off the
balance for a couple of months, he or she should move the usage limit
up five percent. The debtor should continue along with this process so
long as he or she is paying off the entire balance each month.

     If the debtor is unable to acquire a credit card, he or she
should try to obtain a secure credit card. Dr. Don Taylor, a columnist
for Bankrate.com, is a strong advocate for obtaining a secured credit
card to help boost one’s credit score.[24] A secured credit card is
similar to a credit card but the individual has to supply the money up
front as collateral.[25] For example, the debtor would deposit a
certain amount of money with a bank and in turn, that amount would be
the credit limit on the card. Dr. Taylor emphasizes that “[the debtor]
want[s] to make sure that the card provider will report [the] payment
history to the credit bureaus, not all secured cards do, and [the
debtor] want[s] a card that only allow[s] [him or her] a line equal to
the secured deposit.”[26] If an individual chooses to obtain a secured
credit card, one should be sure that he or she pays in full and pays on
time.

III. Conclusion

     A Chapter 7 bankruptcy may take a couple months to complete;
however, maintaining one’s credit and improving one’s score is an
ever-going process. Bankruptcy is intended to give people a fresh
start; however, the credit agencies are not as forgiving. Although it
might seem like a long and tedious road, the sooner the debtor begins
the sooner his or her credit will improve. There are many ways for a
debtor to rebuild his or her credit. Following the steps listed above
and remaining realistic about your spending capability is an excellent
start to rebuilding one’s credit.

[1] Abiworld.org, Annual Non-business Filings by Chapter (2000–2006), http://www.abiworld.org/AM/Template.cfm?Section=Filings_by_Chapter1&Template=/TaggedPage/TaggedPageDisplay.cfm&TPLID=57&ContentID=36295
(last visited Sept. 9, 2007).

[2] Abiworld.org , Consumer Debt is Consistent with Bankruptcy Filings, http://www.abiworld.org/Content/NavigationMenu/NewsRoom/BankruptcyStatistics/Bankruptcy_Filings_1.htm (last visited Sept. 9, 2007).

[3] Id.

[4] For more information regarding how to file for a Chapter 7 bankruptcy, see Stephen Elias, Albin Renauer, and Robin Leonard, How to File for Chapter 7 Bankruptcy, (Nolo 12th ed. 2005).

[5] Aleksandra Todorova, Understanding the Bankruptcy Rules, Smartmoney.com (Oct. 13, 2005), available at http://www.smartmoney.com/debt/advice/index.cfm?story=bankruptcy2004#8 (hereinafter Todorova, Understanding the Bankruptcy Rules).

[6] Aleksandra Todorova, Declaring Bankruptcy Can Improve Your Credit Score, Smartmoney.com (Jan. 22, 2007), available at http://www.smartmoney.com/debt/advice/index.cfm?story=boostscore&afl=myyahoo (hereinafter Todorova, Declaring Bankruptcy).

[7] Id.

[8] Id.

[9] Id.

[10] Uscourts.gov, The Discharge in Bankruptcy, http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/discharge.html (last visited Sept. 9, 2007).

[11] Id.

[12] Federal Citizen Information Center of the U.S. General Services Administration, Personal Financial Choices, http://www.pueblo.gsa.gov/cic_text/money/personalfin/lesson6.htm (last visited Sept. 9, 2007). (hereinafter FCIC, Personal Financial Choices).

[13] Todorova, Declaring Bankruptcy, supra note 7.

[14] FCIC, Personal Financial Choices, supra note 12.

[15] Id.

[16] Id.

[17] Todorova, Declaring Bankruptcy, supra note 7.

[18] Id.

[19] FCIC, Personal Financial Choices, supra note 12.

[20] Nolo.com, How to Make a Budget and Stick to It, http://www.nolo.com/article.cfm/pg/4/objectId/615A0045-C345-42E8-B921681B70D99A44/catId/93EAAECE-AF69-4BB6-9F4497BE703302E9/213/208/218/ART/ (last visited Sept. 9, 2007).

[21] FCIC, Personal Financial Choices, supra note 12.

[22] Id.

[23] E-mail from LadynRed, Moderator for the Credit Info Center ‘Blog’ (Sept. 10, 2007, 21:26:13 CST)(on file with author).

[24] Don Taylor, Rebuilding Credit after Bankruptcy, Banknrate.com, Mar. 1, 2007, http://www.bankrate.com/brm/news/DrDon/20070301_rebuilding_credit_after_bankruptcy_a1.asp (hereinafter Taylor, Rebuilding Credit after Bankruptcy).

[25] Bcu.org, Credit Cards, http://www.bcu.org/creditcards.aspx (last visited Sept. 9, 2007).

[26] Taylor, Rebuilding Credit after Bankruptcy, supra note 24.

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