Can You Get Credit After Bankruptcy?
Many people who are contemplating bankruptcy hesitate because they believe it will be impossible to obtain credit after the bankruptcy is discharged. However, this is not the case. While it may be more difficult to obtain credit immediately after a bankruptcy, it is possible to re-establish credit. The key is to be diligent about searching for available offers and to be willing to accept less than favorable terms for credit in the short run if necessary.
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High Rate Credit Cards
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After a Chapter 7 bankruptcy is discharged, the petitioner has effectively erased from the record the debt that was included in the case. In many instances, this results in a clean financial slate. Some credit card companies will extend credit card offers to people who recently have been granted a Chapter 7 bankruptcy discharge.
While the credit cards offered usually carry high interest rates and may include hefty fees, the advantage is that they are not secured, meaning that no up-front payments are required to open the account. Another advantage is that they report to credit bureaus, so that if the cardholder establishes a clean payment record, he or she can usually qualify within a year or two after bankruptcy for a credit card with better interest rates and lower fees.
Secured Credit Cards
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Secured credit cards require the cardholder to open a savings account, which is used as collateral in case of default. However, with a good payment record, many secured cards can be converted to unsecured cards. Secured cards also usually report to credit bureaus as regular credit cards, not secured cards. Therefore, a good payment record can help the cardholder qualify for nonsecured cards. Prepaid credit cards work like bank debit cards in that the amount of the card limit must be paid in advance. The limit decreases as purchases are made. Prepaid credit cards are a less desirable option for those wishing re-establish credit after bankruptcy.
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Loans Secured by a CD
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Another means of re-establishing credit after a bankruptcy is to take out a loan and use the money to purchase a certificate of deposit (CD), which will secure the loan. The maturity of the CD and the terms of the loan should coincide and be long enough to establish a good record for making loan installment payments, perhaps a year. At the end of the year, the loan will be paid off and the CD will have earned interest. As a result, obtaining credit on more favorable terms should be easier.
Mortgages
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Obtaining a mortgage may be challenging after a discharged bankruptcy, but not impossible. If as a home buyer you established a good payment history during the year after the bankruptcy, you likely will be able to find a lender willing to work with you. Also, you may qualify for favorable interest rates two years after a discharged bankruptcy. This is especially true if you can present extenuating circumstances for your financial difficulties, such as a lost job or serious health problems. Additionally, Federal Housing Administration guaranteed loans may be easier to qualify for home buyers who meet the criteria set for the programs.
Car Loans
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Obtaining an automobile loan is possible after a discharged bankruptcy because many dealers work with a number of finance companies specializing in financing purchases for customers with less than perfect credit. Since car loans are secured by the vehicle, lenders are more willing to extend credit to customers with bad credit. Creditors also realize that someone who recently had a bankruptcy discharged is prohibited from filing for another bankruptcy for several years, which also alleviates some misgivings about extending credit.
Considerations
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These suggestions apply to bankruptcies that have been discharged by a court. Those in the process of executing a Chapter 13 repayment plan or business owners in the process of Chapter 11 reorganization are often barred from taking on new debt without court permission. However, once the Chapter 13 or Chapter 11 bankruptcy is discharged, petitioners are free to conduct their affairs without court supervision.
The other resources a potential customer can present also will influence a decision to grant or deny credit.This means high income earners and customers who can offer credit worthy co-signers may have an easier time reestablishing credit than others. In all cases, however, time does much to heal a credit report, assuming that the debtor is able to establish a good payment record after the bankruptcy petition is discharged.
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