The Number One Rule: Don’t incur any bad credit after the bankruptcy! Be scrupulous in making timely payments in the future and don’t fall for any of the many scams designed to “clean up your credit report.”

Proper Post-Bankruptcy Credit Reporting: One of the great myths about bankruptcy is that it erases bad credit history. It doesn't. Declaring bankruptcy frees you from liability for the debt you owed at the time of the filing. The status of credit accounts should be updated to reflect that these debts have been "discharged in bankruptcy" and that the balance currently due is $0. Improperly characterized old credit accounts weigh down your credit score.

I recommend waiting six months after a bankruptcy discharge before pulling your credit report. You are entitled to a free annual credit report from each of the main credit bureaus which you can order here: www.annualcreditreport.com. One of the things you might watch out for are the several opportunities to add enhancements FOR a price (like your FICO score). This is a free credit report and I would avoid paying for any of their “additions.”

If a debt shows a balance still owing, then you have a right to dispute that item. Follow the instructions for disputing items. The credit reporting agencies should properly report the debt as having been discharged and listing it as having a zero balance. You might be required to provide additional documentation, but sometimes they will merely investigate and correct the improper report.

Note: Your bankruptcy does not discharge debt that arose AFTER the filing of your case. Bankruptcy buys you a fresh start, but does not apply to debt incurred after the case was filed.

How Long Will a Bankruptcy Show on Credit Report? Chapter 13 bankruptcy remains on your credit history for seven years; a Chapter 7 is reported for 10 years. Credit accounts may be deleted at different times depending on their status prior to being included in bankruptcy. For example, an account that was current when you declared bankruptcy will remain on file seven years from the date it was included in bankruptcy. An account in collection when you declared bankruptcy still will be deleted seven years from the original delinquency date that led to the charge off, so it may be deleted before the bankruptcy is.

How Can I Establish Good Credit After Bankruptcy? The way to establish good credit after bankruptcy is (unfortunately) to get new lines of credit and use them! If you are successful in establishing an account, and use it responsibly for a year or two, you will begin to build - once again - a good credit history.

WHAT TO DO? One way is to find a co-signer. Ask a relative or friend with good credit to co-sign your credit application. A co-signer promises to pay if you don't. However, if you don't make payments on time, the co-signer will be responsible for the loan. By failing to pay, you could damage your relative's or friend's credit.

However, often the best way to help rebuild credit is to obtain a secured credit card. A secured credit card is a bank credit card backed by money you deposit in a bank account. If you don't pay off your credit card bill, the money in your account may be used to cover that debt. Shop around to find a good deal. Credit Unions often have excellent secured cards. Wells Fargo has a good card available, but you must wait until a year after your discharge to be eligible. You can compare current information about secured cards at www.bankrate.com. Before you apply, make sure the card issuer will send the information on your credit account to a credit reporting bureau. Look for a secured card with:

  • A low annual fee.

  • No up-front application, processing or membership fees.

  • An interest-bearing account for your deposit.

BEWARE: Many companies offer unsecured credit cards for people with a recent bankruptcy. However, these cards can be VERY expensive credit options, because many of them have:

  • Low credit lines.

  • High interest rates.

  • Up-front processing fees, usually charged to your first statement.

  • High annual or monthly membership fees OR BOTH!

  • A fee for line-of-credit increases.

Having cards that cost for the mere benefit of having it in your wallet is a bad way to establish credit. Because the fees often equal the credit limit on these cards, you may have no available credit until you pay the fees. Also, beware of wolves in sheep’s clothing. Many of the cards charge a hidden fee equal to one-half of the amount of any credit line increases. Thus, a credit line increase of $1,000 may come with a $500 fee!

Over time, you will get better card offers. I have rarely seen the decent unsecured credit card offer to a client who has recently filed a bankruptcy. Don’t be fooled by clever marketing. Most of the many credit offers you will receive should be treated like the plague! Try to resist the temptation to apply for these bad credit cards. Experience has shown that if you refuse credit offers long enough, you may start getting decent credit offers (no annual or maintenance fees) after about 2 years. These usually have higher interest rates. However, if you charge smartly and pay the balance off each month, you will start getting better offers at lower interest rates. And your credit score will begin to rise.

I have clients that are 4 years post bankruptcy with credit cards as low as 10 percent APR and no annual or monthly fees and FICO score over 700. Just remember: the way to build credit is slow and easy and – above all else – be timely in your payments (pay much more than the minimum) and keep low balances compared to overall credit limit availability.

SAVE MONEY! Quit paying fees for credit cards. Service on credit debt is what puts most people into bankruptcy in the first place. It has a way of building overtime until it is a large proportion of monthly household expenditures. Don’t squander your fresh start! Put the money you were devoting to paying your creditors and try to establish a savings plan instead. When it comes time to buying a car or a house, a large down-payment can have a substantial positive effect on the cost of credit.

By: Marty Courson

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Courson Law - Bankruptcy is a debt relief agency, helping people file for relief under the Bankruptcy Code.

Marty Courson is a San Francisco Bankruptcy Attorney who represent clients throughout the Greater San Francisco Bay Area, including Berkeley, Burlingame, Daly City, Hayward, Mill Valley, Millbrae, Richmond, South San Francisco, San Bruno, San Leandro, San Rafael, Oakland, as well as San Francisco County, Alameda County, Contra Costa County, Marin County and San Mateo County.