Filing Bankruptcy and Its Effects on Buying a Home or Car
A bankruptcy filing is a legal action that clears dischargeable debt. To qualify for personal bankruptcy, an individual must attend credit counseling before his or her expected filing date, according to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Filing bankruptcy and it effects on buying a home or car are profound, however you can take steps to improve your credit as quickly as possible.
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Significance
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File for bankruptcy when you cannot budget yourself out of debt within a five year period. Late payments, very high balances, charged-off accounts or collection accounts adversely affect your credit report. A bankruptcy filing discharges these "potentially negative" items and, in some cases, can improve your credit score immediately, according to John Ulzheimer, president of a consumer credit education group.
Considerations
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Knowledge is power. Before purchasing a home or automobile, purchase your credit score from the three major consumer reporting bureaus. According to an article titled, "Declaring Bankruptcy Can Improve Your Credit Score," a bankruptcy filing can affect consumer credit scores in different ways for a variety of reasons." Track changes to your score after a bankruptcy filing to measure how quickly your credit score is increasing. If time permits, allow your credit score at least one year to rebound from a bankruptcy filing, which remains on your credit file for ten years, before purchasing a home or car.
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Favorable Lenders
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When applying for an auto or mortgage loan, apply with a financial institution with which you have an existing checking or savings account. You may not qualify for an unsecured line of credit; however, you can apply for a secure a line of credit. In such cases, you'll need to back the loan with an asset of comparable value. If you do not own high-value assets, obtain a co-signer with good credit--which is seen as a credit score of 720 or better. It is imperative that you repay all loan obligations on-time after a bankruptcy to continue to improve your credit score.
Warning
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Auto and home loans are approved based on credit history and a number of other criteria, such as income level and employment history. Filing for bankruptcy can disqualify you from lower interest loans, which are typically reserved for consumers with less credit risk. Expect to receive higher interest rates and short loan terms.
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