Life After Chapter 7
If you are about to file bankruptcy you are probably just made of questions. What will happen after you file? How long will it take to recover? Will I ever be able to qualify for a car or a mortgage loan again?
Bankruptcy will certainly have a destructive influence on your credit file, but it is not all bad. Take a look at what you can expect after you file and in the future. Keep reading and you will find some of the basics that you can expect along with a few personal experiences peppered in from my friend Carl. Carl is roughly 26 months post Chapter 7 bankruptcy.
Immediately After Filing Bankruptcy
After you file bankruptcy and it is discharged, your score will certainly dip, but it might not dip as far as you think. The impact on your score will greatly depend on your past credit file long before your bankruptcy.
For many, their credit score will dip into the 500s. Yes, this is extremely low and the only avenues of credit that you will probably have available are secured credit cards and from the likes of retailers such as Fingerhut. Don’t scoff at the idea of taking advantage of these outlets, they may be of use.
For others though, credit scores might not drop a far. You might settle in the low to mid 600’s like our friend Carl.
Carl shared with us, “After my bankruptcy, my credit score actually went up. With late pays, my score had been sitting in the high 500’s, around 580. After filing bankruptcy, those accounts were removed and my score actually jumped to a score of around 650.”
The reason for such a high score, if mid 600’s can be considered high, is past credit history. Your bankruptcy will change collection accounts into charged off accounts. What it does not do is eliminate past credit history that was not a part of the bankruptcy.
Past history could include former auto loans, closed credit accounts, or even accounts in good standing that were not included in the bankruptcy.
New Credit After A Bankruptcy
If your credit falls greatly after a bankruptcy, your best bet is going to be a secured credit card. For many, this will be the only outlet and it is an effective one. Simply apply for a secured credit card and place the security deposit down. The deposit will be the amount of the credit, usually 500 dollars or so. After 6 to 12 months of good payment history, apply for an unsecured card.
If your score does not drop as far, you may be able to skip the secured credit card route, but many retailers may still be off limits.
“For me, I was able to go straight to an unsecured card from Credit One with about an 800 dollar limit. They have an annual fee, but it was worth it to rebuild. After a few months, I moved on to a Capital One Card and then before the annual fee was due again, I cancelled the Credit One card.” (Carl)
So credit cards will obviously be available to you soon after a bankruptcy is discharged, but what about auto loans. If your score drops drastically,into the 500’s, it could be an issue without a high interest rate and a big down payment. But what if your score does not drop as far? Here is what we found out about Carl’s experience.
“I reaffirmed an auto loan in the bankruptcy, so I never actually defaulted on an auto loan. That being said, I did default on a number of credit cards and a mortgage ( I actually kept making the mortgage payment but they did not want to allow me to reaffirm the debt.) Within 6 months of my bankruptcy discharge, I was able to secure a new auto loan with a 9 percent interest rate. Not an outstanding rate, but a manageable one.”
So, yes, new credit is not completely out of the question immediately after a bankruptcy but it will come at a bit of a higher cost.
Years After Your Bankruptcy
So what are the lingering effects of a bankruptcy? How will your credit look years after your discharge. For most, you will build credit back slowly, but if you had a strong credit profile before your bankruptcy, things may be different.
We asked Carl to tell us how he stands several years after filing chapter 7.
“It has now been over 2 years since my bankruptcy was discharged and I currently have a credit score of around 720. This is with an auto loan with exceptional history,and credit card utilization at about 3 percent. 720 is in the very good range, but there is definitely a hard ceiling that I can not get past because of the bankruptcy.”
Obviously, a bankruptcy will continue to affect you for years to come. Expect it to have some impact on your score and your ability to secure credit for the full 7 years that it remains on your report. That being said, you can still obtain some level of credit and, with proper management, you can even achieve a score higher than the national average.
Lessons Learned From Bankruptcy
Life is a learning experience and we seldom do things exactly right. So, we asked one more question because we wanted to know what, if anything, someone who filed bankruptcy would do differently.
For Carl, it was very easy to answer. “I would have filed bankruptcy earlier. I waited, hoping that things would turn around and they never did. In that time, I depleted my savings and got far behind on my mortgage and vehicles. If I had to do it all over again, I still would have filed, but I probably would have done it the very second I got in trouble. That would have been at least 6 months earlier. That would have allowed me to maintain some savings and it would have helped me recover faster.”