Recently, I heard from a friend who filed bankruptcy several years ago. Eager to rebuild her credit at the time, she asked me for advice and read everything she could find about credit repair. She disputed mistakes on her credit reports, got a secured card, and did everything she could to get back on track. Her efforts paid off and she was able to boost her credit scores significantly in a relatively short period of time.
Now she’s trying to help someone else who is in a similar situation. The catch is that he is still in the midst of a Chapter 13 case that has not yet been completed. She wants to know what, if anything, he can do now to start improving his credit. “Can he get a secured card?” she asked.
Before we delve into the specifics of getting credit while in bankruptcy, let’s briefly review the basics. Bankruptcy is a process that officially starts with a consumer filing for bankruptcy and ends when the case is discharged. Consumers usually file under one of two chapters in the bankruptcy code: Chapter 7 or Chapter 13. Chapter 7 bankruptcy is a usually a quick process that takes up to six months. Chapter 13 cases, on the other hand, usually last between three and five years. During that time the debtor will make payments to the trustee.
How long bankruptcy remains on your credit reports depends on which type of bankruptcy you file. Though all bankruptcy cases can be reported for ten years from the date of filing (not the date of discharge), the credit reporting agencies typically stop reporting Chapter 13 cases seven years after they were filed.
That means someone who takes five years to complete a Chapter 13 could find that it’s no longer appearing on their credit reports just two years after their case is completed. After the bankruptcy and all the other negative information drops off, they can find themselves with a low score due to the fact that they have few or no accounts reported.
The key to building stronger credit is to make sure current positive references paid on time, over time are listed on your credit reports. If some of your accounts remained open during your bankruptcy, they can help. For example, you may have continued to make your normal payments on your auto loan, mortgage and/or student loans. (Caveats: Sometimes accounts you continue paying may carry the notation “included in bankruptcy,” and some mortgage lenders may refuse to report mortgages that were not reaffirmed. Check your credit reports to see how accounts are reported.)
As for credit cards, most people who file include their credit cards in their cases. Even when a card that has no balance is left out, though, the issuer may close the account if it discovers the cardholder has filed for bankruptcy.
Borrowing in Bankruptcy
Going back to the idea that a current loan paid on time can be helpful to your credit: Can you get one before your Chapter 13 case is completed?
“You are not supposed to obtain any new credit during the course of a pending Chapter 13 plan because all of your disposable income is committed to paying your pre-petition creditors,” warns Eugene Melchionne, a Connecticut bankruptcy attorney. “If you think about it, this makes sense. Why should you be able to pay new creditors all of what is due when due when you are not paying 100% plus interest to your past creditors?”
But what’s acceptable here may depend on where you file and the circumstances of your situation. If your clunker car dies during the second year of your Chapter 13, for example, you may have no choice but to get a loan for a vehicle that will get you to work.
Atlanta bankruptcy attorney Jonathan Ginsberg says that where he practices, in the Northern District of Georgia, you can get a loan while in a Chapter 13. But “you must get permission from the judge.” You’ll have to fill out paperwork detailing the loan terms and where your down payment funds are coming from. “You also have to show how your budget will allow for an outside-the-plan payment,” he says. If the trustee agrees it’s OK, it’s then submitted to the judge.
What about credit cards? “If the request is for a credit card (i.e. for travel) we would file a motion setting out why the credit card was necessary and the anticipated usage,” Ginsberg explains, adding, “All of this has to be processed through the attorney.”
In other words, don’t run out and get new credit while you are still in bankruptcy. Talk with your attorney first.
Car loans in bankruptcy are more common than any other other type of loan, observes Cathy Moran, a California bankruptcy attorney. Though she says she “once had a Chapter 13 debtor get a loan to buy a house, where that was going to be cheaper than rent.” She also points out that bankruptcy trustees or judges usually have some kind of benchmark for what size loan they will allow. “Last time we did it several years ago, our trustee would allow a loan of $18,000-$20,000 without any justification. [Ask to borrow] more than that and you have to work to prove why.”
The request must be reasonable and it’s never a sure bet. “Usually our judges will go along with the Trustee’s analysis and recommendation,” Melchionne says. “I have had a Trustee suggest a cheaper car or allow a smaller loan for a lesser car, or in one case recommend public transportation to get to work.”
Rebuilding Credit in Bankruptcy
What can you do to start rebuilding your credit while you are in bankruptcy?
- Review your credit reports. About a month after your Chapter 7 case is completed, or a few months before your Chapter 13 discharge, get copies of your credit reports from all three major credit reporting agencies to check whether the information reported is accurate. Dispute any mistakes you find on your credit reports.
- Monitor your credit scores. During your bankruptcy, you can continue to monitor your credit scores. You can pay for this service or use a free tool. While it may feel like a punch in the gut to see formerly strong scores plummet during bankruptcy, just remember that you can see significant improvement if you are proactive about building strong credit references after this is over.
- Get permission before you borrow. Talk with your attorney before you try to get any kind of new credit. It’s not worth jeopardizing your fresh start.
Once your case is discharged, you can start the credit improvement process in earnest. It’s not going to happen overnight; this is one of those “slow and steady wins the race” situations.
If you don’t have any credit cards still open, you may want to consider getting a secured credit card. The best secured cards report to all three major credit reporting agencies. Use one of these cards for small purchases you’d make anyway, pay it in full to avoid interest charges, and you’ll be off to a positive start.