Category Archives: Bankruptcy

Bankruptcy can be better for your score than ignoring debt

This post originally appeared May 17, 2018 on CreditCards.com as “Credit score impact of ignoring card debt while living on Social Security income

By Barry Paperno

Dear Speaking of Credit,
I’m 70 years old, on Social Security income, and have about six credit cards with about $20,000 charged (medical and living expenses). I don’t care about my credit rating, though I do have a mortgage and have never missed a payment. Someone told me just ignore the credit card debt, since they can’t get you for anything. What should I do? – Ron

Dear Ron,
Yours sounds like a classic case of expenses – medical and otherwise – far exceeding what Social Security alone can cover. It makes perfect sense then to be looking for a way out from under those $20,000 in credit card debt.

Your proposed idea of simply “ignoring” the debt is one of a couple of solutions – the other is filing for bankruptcy.

We’ll examine both alternatives in terms of cost, preserving your assets and impacts to your current and future credit scores.

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After paying late, some points return quickly, others don’t

This post originally appeared January 18, 2018 on CreditCards.com as “‘How quickly can my score recover from a late payment?

By Barry Paperno

Dear Speaking of Credit,
My credit score dropped over 50 points and my husband’s fell 105 points for one 30-day-past-due car payment. We had been in good standing for almost two years before that mistake.

Will my late payment be reported as paid now that I have paid it? And if so, will that bring the score back up? A drop of 105 points is a lot!

We’ve been trying to work on our credit to buy a house. Thanks. – Tina

Dear Tina,
Sorry to hear of this setback following your diligent credit rebuilding efforts over past couple of years.

As you will see, despite these score losses, your hard work has not been in vain. Yet a good dose of patience may be required over the coming months as you look to undo the credit score damage from this untimely mistake.

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Don’t expect much score change with Chapter 13 discharge

This post originally appeared January 4, 2018 on CreditCards.com as “‘Is bankruptcy discharge a credit scoring factor?

By Barry Paperno

Dear Speaking of Credit,
I was wondering by how many points I might expect to see my credit score increase when my Chapter 13 debt is discharged next month.

The terms of my Chapter 13 agreement allowed for me to open up to $2,000 in new credit, which I did, and my score has improved some.

Unfortunately, I now have two hard inquiries and a short average age of credit that are keeping the score down.

Can I expect to see a decent rise in my score just due to achieving discharge, or is that not really a factor? – Denise

Dear Denise,
As you reach the discharge milestone of your Chapter 13 bankruptcy, you have good reason to breathe a sigh of relief at finally being free of any remaining debt following the required three- or five-year repayment plan.

As usual, the best way to know where your score is going is to understand how it got to where it is.

Fortunately, that direction has been upward, thanks largely to a couple of important sets of scoring calculations working in your favor:

  • Adding new positive credit, as noted in your question.
  • The length of time since your most recent “derogatory” item – something you may or may not already be aware of.

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Boost post-bankruptcy score with new positive credit

This post originally appeared October 15, 2015 on CreditCards.com as “Getting a credit card after bankruptcy can help credit score“

By Barry Paperno

Dear Speaking of Credit,
My husband and I recently had to file for bankruptcy due to loss of income. If that’s not painful enough, we have this looming bad credit over our heads. We filed in January of 2015 and have been making monthly payments. I recently was approved for credit card with a low balance. Will getting credit during my bankruptcy help in establishing good credit once again? Thanks! — Lisa

Dear Lisa,
Actually, yes, adding positive credit to a less-than-stellar credit report happens to be a very good way to start raising your FICO score beyond what simply the passage of time will heal.

Though not considered an absolute must for rebuilding credit, opening new accounts shortly after filing for bankruptcy can help speed up the credit rebuilding timeline. When in rebuilding mode, new accounts can help add points to your score.

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A journey from the throes of bankruptcy to high FICOs

By Barry Paperno

Sandy is a 64 year-old retired firefighter living in the Texas Panhandle and a proud Marine Corps veteran of Vietnam. He has gone from “a complete lack of knowledge about finances” that led from his first car payment at 20 years old to bankruptcy at 42, to achieving excellent FICO scores in his 50s and 60s.  These days he shares much of what he’s learned about credit by moderating one of the leading online financial consumer forums. He has been so kind as to answer some personal questions about how he found himself headed for bankruptcy, how he eventually turned his finances around and what he’s learned from it all.  –Barry

Did you file Chapter 7 or 13? When did you file and how much debt was discharged? 
I filed a Chapter 7 in June 1993. We kept our house and two cars, so it was only credit card debt that was discharged. I believe it was around $30,000, which doesn’t sound like all that much these days, but 22 years ago it seemed like the Mt. Everest of debt. I will say this about the bankruptcy, I am neither ashamed nor proud of it. It’s part of my life’s journey, so I don’t shy away from it.

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Done right, post-bankruptcy score can be a good one

This post originally appeared March 5, 2015 on CreditCards.com as “Boosting credit after a discharged bankruptcy

By Barry Paperno

Dear Speaking of Credit,
I filed for bankruptcy in July 2011, and it was discharged in September 2011. My current credit score is 690. Currently on my credit report: 1st/2nd mortgages, a car note, one credit card with a limit of $750. I am looking at refinancing my 1st/2nd mortgage loans into one loan at a lower interest rate. The lender declined, as they said the magic year is four years after a bankruptcy to get approved. They also mentioned that I should try to raise my credit score to 700 to get an even better rate.

My questions for you: 1. Which dates are reported to my creditors — the discharge date or filing date? My credit report reflects my credit cards showing a date of October 2010 and my mortgage company shows July 2011 (which may be to my advantage because the discharge date is actually September 2011). 2. What can I do to bring my credit score up to 700 in six months? All payments are timely and I keep my credit card below half of the available credit. 3. Would you suggest getting another credit card to help me or hold off? Thanks in advance. — Cate

Dear Cate,
I’ll sort out these bankruptcy-related dates — filing and discharge — for you in terms of how they’re used in the reporting of your credit history, which dates are reported to your creditors, how this information impacts your credit scores and the date used to determine when you can be considered for the refinancing of those mortgage loans.

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Reaffirming debt can speed credit score recovery following bankruptcy

This post originally appeared November 6, 2014, on CreditCards.com as “Steps to rebuild credit after bankruptcy

By Barry Paperno

Dear Speaking of Credit,
I just filed for Chapter 7 bankruptcy. My current car loan is requiring me to sign a reaffirmation for the car. What do I do about that? What are the disadvantages of signing those documents? Will it help build up my credit? Also, I don’t have any credit cards open at this point since they were all in collections. How do I go about getting back credit and reapplying for credit cards? Please advise. — Adenike

Dear Adenike,
Sorry to hear about your bankruptcy, though, if it helps any, you’re not alone. In the first three quarters of 2014, more than 900,000 consumers filed for bankruptcy, often due to circumstances beyond their control, such as medical expenses and job loss. Fortunately, within this hardship you now have the opportunity to wipe the slate clean and essentially start your credit life over.

If there’s a plus side to bankruptcy, it’s that taking this step can be better for your credit score than allowing debts to go unresolved indefinitely. It affords you some piece of mind when collection calls and letters stop, and after you file and your score bottoms out there’s truly nowhere to go but up. And up it will go, as long as you rebuild your credit sensibly.

To give you just one example of how your score can improve after bankruptcy, the filing date appearing on your credit report becomes the date from which the “recency” of the bankruptcy is measured by the credit scoring formula, both for individual accounts included in bankruptcy and the public record notation of the bankruptcy filing. This is important because the recency of any negative item, such as bankruptcy, is one of the most heavily weighted factors within the most heavily weighted category of scoring — payment history — amounting to 35 percent of your score. The longer the time since the bankruptcy, the less negative impact it will have, and the higher your score will go.

Long-lasting damage
A good place to begin discussing the rebuilding of your credit is with the length of time bankruptcy-related information stays on your credit report. Generally, most negative information remains on a credit report for about seven years, with Chapter 7 bankruptcy public record items being among the most notable exceptions. Some examples of how long you can expect to see bankruptcy-related items on your credit report are:

  • Chapter 7 bankruptcy public record items: 10 years from the filing date.
  • Completed Chapter 13 bankruptcy public record items: seven years from the filing date.
  • Cards and loans included in bankruptcy: seven years from the filing date, whether Chapter 7 or 13.
  • Collections discharged in bankruptcy: 7.5 years from the date the debt first became delinquent, whether Chapter 7 or 13.

Reaffirmation and your credit score
In addition to inquiring about the best ways of obtaining new credit cards, your questions about reaffirming the auto loan are particularly good ones, as even bankruptcy attorneys often don’t know such credit scoring specifics.

When reaffirming your auto loan, the bankruptcy court is allowing you to exclude this debt from the bankruptcy, meaning you can keep the car and continue to pay under the original or newly negotiated terms. Reaffirming may result in the notation “Reaffirmation of Debt” added to the auto loan on your credit report. But you should be pleased to know it will have no negative impact on your credit score.

As to whether reaffirming will help build your credit, you’ll also be happy to know that it will, as long as the loan remains in good standing. However, there could be some noncredit disadvantages to reaffirming, so I’m going to strongly recommend consulting with your bankruptcy attorney before agreeing to the reaffirmation.

You can proactively accelerate the rebuilding process by, in essence, diluting the negative credit on your credit report with the addition of new positive (paid on time) accounts.

Another important piece of the credit score rebuilding puzzle to know is that you can proactively accelerate the rebuilding process by, in essence, diluting the negative credit on your credit report with the addition of new positive (paid on time) accounts. This process taps into the credit scoring calculations that evaluate the proportion of positive and negative accounts within the total credit picture.

3 credit rebuilding tools
Three good tools for building positive credit history are:

  • Secured credit cards
  • Secured personal installment loans
  • Unsecured credit cards where you have been added as an authorized user

Secured credit cards and secured personal installment loans are made available to low-scoring consumers for the purpose of credit rebuilding, and are backed by a savings account used as collateral to protect the lender in case of default. Both secured products are typically reported to the credit bureaus each month, but you’ll want to double check before applying. Both are also treated just like the unsecured variety by the credit scoring formula. For secured cards, it’s best for your score and pocketbook to make small purchases and pay in full each month to keep the card active while avoiding finance charges. For both secured and unsecured cards, there is no scoring benefit to carrying a balance from month to month.

For secured personal loans, use the proceeds while making the payments on time each month. Unfortunately, since it’s best for your score to keep these loans open for as long as possible, you’ll be paying interest, which makes secured personal loans the most expensive option. Still, the costs may be offset by the possibility of adding points to your score by demonstrating you can handle a mix of credit types — revolving (cards) and installment (fixed-payment loans).

With authorized user cards, when you’re added to an account in this way, you are typically not held responsible for the debt and there are no credit requirements. Yet the entire account history appears on your credit report and contributes positively to your credit score — assuming, of course, the primary cardholder’s account is in good standing. One rather odd feature of this score-building tool, but one that that can enable the cardholder to feel less at risk, is that the authorized user doesn’t have to use or even possess a card to reap the benefits — again, assuming the account remains in good standing.

Hope this helps. Good luck in your new credit life after bankruptcy!

Have a question or comment?  Let’s hear it!