If you’ve filed for bankruptcy and you aren’t sure when you should start rebuilding your credit, the answer is simple. To time to begin rebuilding your credit is immediately after your case is closed, and you get your discharge. Immediately following bankruptcy, it will be difficult to obtain credit, but it’s not impossible. With a bankruptcy filing recorded on your credit report, most will need to pay more to borrow money, since lenders will consider them a subprime borrower.
What Does It Mean to Be a Subprime Borrower?
Bankruptcy filers and potential bankruptcy filers frequently hear the phrase “subprime borrower” in reference to obtaining post-bankruptcy. Subprime borrower is a phrase that refers to borrowers that lenders see as a higher credit risk. Consumers recognized as subprime borrowers typically pay higher interest rates, and higher penalties for defaults because lenders consider them a significant risk.
What Is the Immediate Effect of Bankruptcy On Your Credit Score?
Bankruptcy is a negative “mark” on a consumer credit report. Yet it also results in a discharge of debt. Since many bankruptcy filers were struggling for a time before filing, they already had a low credit score. So, it’s not uncommon for bankruptcy filers to see their credit score increase after filing due to the immediate and dramatic reduction of their debt-to-income ratio. Filing Chapter 7 also eliminates the consumer’s ability to qualify to file Chapter 7 for another eight years, which lenders can see as a positive when weighing risk factors.
Do Chapter 13 Bankruptcy Filers Have an Easier Time Obtaining Credit Post-Bankruptcy?
Chapter 13 bankruptcy filers will often see a reduction in the debt-to-income ratio that can positively affect their credit score, but the change doesn’t occur as quickly. Chapter 13 debtors are required to stick to a strict budget for the duration of their repayment plan (3-5 years), and many lenders assume (for a good reason) that they are now much more equipped to manage their finances efficiently.
How Quickly Should a Bankruptcy Filer Seek Out New Credit After Receiving a Discharge?
Bankruptcy filers should try not to borrow significant sums of money too quickly. The best idea is generally to obtain a small amount of credit and handle it carefully, making on-time payments every month to re-establish credit. Once a positive pay history has been established, the filer will have access to more favorable terms. Waiting until the credit score has increased is a good idea. If you aren’t sure when you should consider seeking out a loan post-bankruptcy, you can start with the general rule of thumb that a credit score of 650 or above should offer decent options.
Keep a Close Eye On Your Credit Rating After Bankruptcy:
After bankruptcy, consumers should keep a close watch over their credit report and their credit score. It is a good idea to obtain a copy of reports from all major credit reporting institutions annually, including Experian, TransUnion, and Equifax. Examine the reports for errors, inaccurate information, etc.
If you need to discuss filing bankruptcy or if you have questions about how bankruptcy will affect your credit, please don’t hesitate to get in touch. Most bankruptcy offices in the Chattanooga area don’t have a single Consumer Bankruptcy Specialist on staff. Our office is the only one in Chattanooga with two. You are in good hands with Kenneth C. Rannick P.C.