Q: My husband and I are going to file bankruptcy within the next two to three months on our personal accounts and our business. What is the best and fastest way to recover once the bankruptcy has been discharged so that we can buy a home and rebuild our financial lives?
A: We’re sorry to hear that you are going through severe enough financial difficulties that you’ll be forced to file for bankruptcy. It must be extremely rough to hear how the economy is doing so well when you’re having such a tough go of it.
Assuming you move through the bankruptcy process quickly, you’ll want to have a plan in place to start rebuilding your financial lives from the day your bankruptcy ends.
And, as you suspect, you’ll be rebuilding your credit from the ground up because once you file for bankruptcy, your credit history will disclose that filing and your credit score will drop precipitously. We have to assume that you’ve already weighed the pros and cons of filing so we won’t discuss those here and only address the question of what to do after bankruptcy.
If you haven’t viewed your credit report in a while, it would be good for you to download a free copy of your credit report from Equifax, TransUnion and Experian from AnnualCreditReport.com. You won’t have to pay anything to download each report, which you get free once a year from each of the credit reporting agencies.
AnnualCreditReport.com is run by the three agencies, under a mandate from the Federal Trade Commission. They may try to sell you other products while you go through the site, but you can skip the offers and just get your reports. These reports will reflect your current credit report and give you a baseline of where you are financially.
Your report may show late payments on mortgages and credit cards, missed payments, collections from creditors and all credit accounts you may have open or closed. The idea going forward is for you to keep everything you do to your credit in pristine shape after bankruptcy. That means paying any bill (credit card, mortgage, rent, car payment, student loan, medical bills, etc.) early and never late. You should also try to pay all of your bills in full.
Think of yourself as a climber going up an icy mountain. The terrain is slippery, but you have to take careful steps all the way up. If you slip, you might slide all the way down, but if you do things right along the way, you’ll get the satisfaction of great views and you will have reached your goals.
Paying all of your bills on time and in full should help reestablish good credit and increase your credit score, but it will take time. Each payment you make on time improves your credit. After a year, you may receive a few credit card offers. You should expect the offers to be mediocre, but every credit card (if used properly) will help build your credit. After two years, you may receive offers with better terms. This process must assume that you take the necessary steps to keep your financial house in order.
Each year, you should pull your free copies of your credit report from Experian, Equifax and TransUnion. A year or two after your bankruptcy has been discharged, you can approach a mortgage lender or mortgage broker and have them pull a copy of your credit. That pull may ding your credit a bit, but it will give you an outsider’s view of whether you are on your goal of improving your credit and credit score. If at one time your credit score was 750, you might find that after the bankruptcy, your credit score might dip down to the low 500s.
If you keep your head down, pay your bills on time and use your credit cards or any credit you have wisely, you may see an increase of up to 100 points after a year or so. When you are in the low 600s, your credit is still too low for most good loan products, but you can keep working at it until your credit score is back to the mid-700s.
There are companies out there, including, financial firms such as USAA, and other credit card companies that will provide you with a credit score as part of their services to their customers. While that credit score is not an official score, it will help you on a monthly or bimonthly basis in seeing if there is any change to your credit score. You’re starting quite low, so you might see improvement from time to time and that improvement should encourage you to keep your financial house in order.
Once your score improves, you can then find the right mortgage lender or broker, the right real estate agent, the right attorney and move toward your goal of buying a home.
Good luck as you walk down this difficult road.