The Truth About Credit After Bankruptcy

Those considering bankruptcy frequently worry that they will never get credit after  they file. Or they worry that it will be 10 years before they can get credit.

Neither is true.

Can I keep a credit card out of the case for use later?

If you owe money on a credit card at the time you file bankruptcy, you must list the card as a debt.

Remember, the schedules are filed under penalty of perjury:  perjury in connection with your case can lead to denial of discharge of all of your debts.  It is also a federal crime.

If you don’t owe anything on the card, you don’t have to give the credit card company notice of your filing.  Note, however, that they may find out through other means and cancel the card as a precaution. American Express is notorious for this.

Most credit card companies will allow you to keep their credit card for use after your discharge if they suffer no loss in the case.  The decision is up to the creditor, but most creditors want to avoid the loss incurred when the debt is discharged, and want your future business.

Our experience is also that newly discharged debtors are frequently solicited for new cards!

 What cost credit?

Consider carefully whether the price of keeping an existing credit card by paying off the balance on the card before filing is worth the benefit of continuing charge privileges.  Ask yourself:  would I pay an annual fee equal to this balance to get a credit card?

Can I get  new credit after bankruptcy?

In today’s competitive lending environment, credit is available to the recently bankrupt.  It may be more expensive than before, and carry lower limits.    A secured credit card is usually available at lower rates than unsecured cards.

Rebuilding credit

Rebuilding credit worthiness after bankruptcy is a matter of obtaining a toe-hold in the credit world and treating that credit with respect.  Use credit cautiously and pay on time.

Before plunging back into the credit world, consider the extent to which easy credit lead to the need to file before you sign up for new cards.

Can I buy a house after filing bankruptcy?

Absolutely.  Studies show that 2-3 years after a discharge, those who filed can qualify for a loan on the same terms as if they had not filed bankruptcy.

That means that the lender will be much more interested in your down payment, the stability of your income, and the relationship between the loan payments and your monthly income than your past financial troubles.   The tumultuous financial times we are living through may upset the usual “rules” on credit.

Is my credit record ruined by filing bankruptcy?

In my opinion, bankruptcy is no more harmful to your credit record than the financial circumstances that lead to the filing.

In making the decision to file, I believe it is much more important for your future financial health to look at your net worth (assets minus debts) than at your ability to borrow in the future.

Most debtors considering filing, even those who have never missed a payment, couldn’t get new credit from a lender who truly looked at their financial condition.  So the fact that there are no negatives on their credit report is only marginally meaningful when looking at the whole picture.

Bankruptcy at least makes all the debt shown in the negative history unenforceable.  Objectively, a debtor is a far better credit risk afterwards than before. Subjectively, credit managers are individuals who may not understand bankruptcy or look beyond its negative aspects.

Remember that a discharge is not going to erase the record of your debts listed in your bankruptcy.  Credit reporting agencies are within their rights in showing accurate history about your financial affairs.  You want to make sure that the discharge also shows on the credit report so that creditors understand that those old creditors have no legal claim remaining.  Correct any errors on your credit report.

The point of bankruptcy is to be able to SAVE afterwards, not necessarily BORROW again.

Read more

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About the Author
Northern California bankruptcy lawyer Cathy is a 30+ year veteran of bankruptcy practice in the Silicon Valley. She is known for energetic representation of clients and her command of bankruptcy law.