Credit Can Be Restored After Bankruptcy

February 07, 2013

Credit Can Be Restored After Bankruptcy

Article provided by Mitchell & Malone Visit us at http://www.mitchellmir.com

In a tough economy, Texas families may find themselves with more debt than they can handle. Filing for bankruptcy is a workable solution for many Texans, but along with the relief that comes with managing debt may come worries about the long-term financial effects of bankruptcy.

Some of those worries are not well founded. In particular, a bankruptcy filing need not permanently ruin a filer's credit, even though the bankruptcy will remain in a credit report for seven to 10 years.

Bankruptcy and Credit Scores

True, there are effects on credit scores. A report from VantageScore, one of the nation's credit score generators, stated that credit scores go down 200 to more than 350 points because of a bankruptcy. Another score provider, FICO, cuts credit scores 130 to 240 points due to bankruptcy. By comparison, a foreclosure lowers the VantageScore numbers by just 80 to 170 points.

What is important to remember is that consequences will diminish with time. Once debts are discharged through bankruptcy, a filer could see secured credit card offers showing up in the mail a month later. Wise use of a secured card, which requires keeping some funds deposited in the issuing bank, is a great way to rebuild credit. Credit scores can improve if card users religiously make payments on time. It is then usually possible to move on to a less expensive unsecured credit card within a year or less.

Mortgages After Bankruptcy

More good news is that people can even qualify for a mortgage fairly soon after bankruptcy. Federal Housing Administration mortgages can be obtained one year after an individual exits Chapter 13 bankruptcy, or two years after Chapter 7 bankruptcy.

A Chapter 13 bankruptcy is less common and entails commitment to a repayment plan covering some fraction of debt. About 70 percent of individual filers use the Chapter 7 plan, which eliminates nearly all debt. Lenders look at Chapter 13 filers as being more responsible, so more deserving of credit sooner.

Other types of mortgage, such as conventional Fannie Mae or Freddie Mac loans, can be granted two to four years after going through bankruptcy. Rarely, loans can be issued sooner if there were special circumstances that led to the bankruptcy, such as illness or the death of a spouse.

The overall key to achieving home ownership post-bankruptcy is responsible financial behavior to restore credit. This point cannot be emphasized too much. Besides taking out credit cards and managing them carefully, filers should also pay all other bills on time, especially utility bills and rent.

Any Texan who is considering bankruptcy should consult an experienced bankruptcy attorney. An attorney can answer more fully any questions about the effects of bankruptcy and help get clients on the road to financial recovery.