How to raise your credit score after chapter 7 discharge
The simplest way to raise your credit score, before or after bankruptcy, is to follow a regimented schedule of payments. Make timely payments of loans your priority. Slowly you will see your score rise from the low 400s or the 500s to 600 and beyond. Cajole the lenders into smaller installment amount per month (increased loan payment tenure), if possible. That way, you can be more regular on installment payment, as the monthly fee comes down. Do not do everything on credit while the old credit is still showing. Most people will say till 30%. However, I would suggest you stay indebted below 50% of total eligible loan amount to improve your credit score after chapter 7 discharge.
When should I consider bankruptcy?
Sometimes, trying to cut down loan does not yield any result. This happens when you buy something on credit, calculating a probable income. However, life surprises us often, and that income doesn’t cometh.
The question then becomes of not how to make a plan for better loan payment but rather on how to arrange for that payment. You go for refinancing over a more extended period. Unfortunately, even when things do not improve, while re-financing pulls down your credit rating.
The loan with its increasing interest, become much more significant than original and impossible to pay with your current income. Consequently, lenders start hounding you.
In this scenario, is better to hive off the unsecured and smaller secured loans with bankruptcy chapter 7. You will still get to keep some basic exempt items like your home or a car. This will allow you to earn your livelihood and make future repayments for the loans that you will inevitably require even after bankruptcy.
Will I be able to improve my credit score after chapter 7 discharge at all? Can I do it quickly?
Credit score after bankruptcy momentarily come down by 150 points on an average after bankruptcy. Sometimes you are already in debt with garnishments, missed-tax payments, missing alimony, child support, refinancing apart from normal loans, that your credit score is already in doldrums, i.e., low 400s.
In that case, bankruptcy chapter 7 would, in fact, boost your credit score and results will show within 3-4 months. That’s because, most of the unsecured loans will disappear, keeping a fractional secured loan part to be repaid per month.
That small amount is your legal debt, and if pay it regularly, your credit score will soon rise to the average.
However, if you are in the 680s score range, bankruptcy will hit you hard. You will no more be a part of the platinum of premier group in the eyes of the lender. All because your score will most probably crash by 100-150 points in the humble 550 range.
It’s said that FICO score follows such a pattern, that higher points you have, more will be the impact in case of default. A score of about 750 can fall to 600 or below with a foreclosure.
But with perseverance in paying off the remaining loans timely, and not maxing on unsecured credits (rather remaining within a nice 40% limit of total unsecured eligibility), soon you will notice your credit score after chapter 7 discharge move up to the 580s and then hopefully cross the upper average psychological level of 600.
What is the average credit score after chapter 7 discharge?
Within 2-3 the months, the average credit score after chapter 7 discharge will suffer a 100 points initial jolt. It usually remains in the 500-550 range for the average debtor, unless he was already wallowing in the 450s, for default right and left.
However, owing to crash in the debt installment amounts paid per month after discharge, usually, the credit score soon crawls up to the upper 500 range within 6-7 months.
Bankruptcy credit report penalty lasts a decade. Chapter 7 bankruptcy will reflect on your credit rating for a good ten years. For chapter 13, it lasts for seven years. That’s how long the penalty lasts from the date of final discharge of respective bankruptcy cases.
But it’s not so awful. Because with the passage of time, the weight of bankruptcy will decrease on your overall credit report. For chapter 13, this period is seven years. Both are counted from the date of discharge.
So, will my credit score increase after bankruptcy discharge?
Regular repayments and frugal spending (keeping loan like within 40% of max. eligibility), will go a long way in improving your credit score.
Your financial behavioral change will soon outperform bankruptcy effects.
The positive change will start to show in your reports one-year onwards, from the discharge date. Keep it simple and be patient. Hauling up the score from 550 to above 650 and then above 680, where you get normal interest loans, take about 2 years.
Better to have automated installment debit (paying manually is a psychological pain, and you will miss an installment sooner or later) with no loan except the inevitable ones need for livelihood.
Follow this, and I promise you that your FICO score will creep up to 680 levels within 2 to 2.5 years.
FICO Score is interesting let’s see how FICO determines a credit score. It is programmed in a way somewhat like the “natural language processing.” In short, is programmed to understand and predict the motive of taking loan verses blindly following a fixed table of “more than” or “less than.”
So, when multiple credit rating agencies enquire, flashing a red light on your credit report, Fico does not blindly downgrade you. Rather it deciphers the motive behind your multiple credit enquiries.
Maybe you are searching for the best student loan quote or better quote for your car. It does not give undue weightage to multiple enquiries within the last 30 days of building the credit report.
35% of total credit score is given to your history of earlier loan repayments. Rightly so. Human behavior does not change in a day or a month. If you were doing on EMIs before, the chances are that the next lender will also face this problem from you.
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30% of the score is given by Fico rating agency, to the amount owed. Rather than how much you owe, it checks how much you are bursting at the seams with the amount already in debt versus the maximum amount of loan you can apply for (with your credit card limits of other loan facilities).
You may have a loan of 100,000 $ but still have a spare of another 100,000 $ loan limit (used unto 50% capacity), while your friend may have only 25,000 $ in loans, but his total eligible amount may be 30,000 $.
This means he has used about 75% of total capacity while the former has used 50%. Naturally, he is living more on loans than you, and hence credit rating will be lower.
Rest factors like debt mix (little-secured loan, a credit card, bank loan) are also counted, but they are not so important as these two factors.
To talk figuratively as to how credit score is reduced in bankruptcy, blog of Justin McHood, a renowned mortgage broker in Arizona, states that for reaching near your maximum limits of credit can cost you 10-45 points downfall, while just being 30 days late in payment may slash off 60-110 points while a mini bankruptcy like foreclosure brings down your credit appraisal anywhere between 85-160 points.
Factors which affect your credit score
- Late payments (practically where installment is not paid even 90 days after due)
- Debt (amount of debt vs. your maximum available limits) and
- Bankruptcy (10 years straight for chapter 7 with diminishing weight) negatively affect your credit score.
Go for chapter 7 bankruptcy when the loan becomes too overwhelming. However, it is not a panacea for all your debt ills. You may get to keep a small home with probably a basic car so that you can continue to earn. But what gets lost is the business, the property you painstakingly nurtured over the decade. Your bungalow is lost not only for you but for your future generations.
Also filling and fighting chapter 7 is not for peanuts. 335$ (please check the latest rate) is the prevailing rate of filing the case. If your case is uncomplicated, attorney fees range been 1000-1500 $. But this is for the ideal case. Existing foreclosures, garnishments, prior chapter 7 case within the previous eight years, multiple creditors; have any of these and attorney fees will rise exponentially.
Better, try to renegotiate the debt into fixed interest rate loan over a more extended time frame of a lump-sum payment which will forgive the rest of your loan.
The same attorney whom you had thought for filing bankruptcy, will happily negotiate with the lenders on your behalf for out – of- court settlement.
Why you need to improve your credit score?
But one thing is for sure. If you want to improve or want a better lifestyle after all the roughshod, need to improve your credit score after chapter 7 discharge is a must. A higher score (above 680) means a loan from reputed organizations. Reputed organizations indicate more transparent procedure and terms. The interest rate is lower as the competition is higher to come out the debt.
If your score is below 600, the lender chooses you at his terms. At scores above 680, you select the best from a host of others. All because to them, a score above 680 represents a safer bet with lots chances of default. Before this, the risk factor increases your premium.
Why you need to hire David Galler to improve credit score after chapter 7 discharge?
In case you are thinking on the line of bankruptcy, you may contact David E Galler, founder of Galler Law. Mr. Galler specializes in bankruptcy, especially chapter 7,13 or chapter 20.
As per his admission, he has a success rate of almost 99% successful discharge in the Chapter 7 case. His success rate in chapter 13 cases is also enviable. What sets him apart is the aggressive stance he takes against the belligerent lenders, who want to rip off the debtors.
He understands the Bankruptcy code better than many in Atlanta, the state of Georgia where he practices. David Galler is on a mission to exempt as much as possible for his clients. Talk to him personally on the phone from Monday to Friday between 5 pm to 7 pm (if he has no other pressing commitments).
- How does Chapter 7 bankruptcy affect my credit?
The bankruptcy will show for ten years from the date of discharge of Chapter 7.
- How long will bankruptcy affect my credit score?
For chapter 7 it will affect your credit score for ten years in diminishing pattern, should you pay your installments properly after discharge. For chapter 13 defaulters, this period is seven years.
- How long does it take for a bankruptcy to be discharged?
While chapter 13 takes anywhere between 3-5 years (because is basically for repaying over a longer time frame), chapter 7 needs only 4-6 months on average.
- How does Chapter 13 bankruptcy affect credit?
It works in the same way, especially for FICO scores. FICO does not differentiate between chapter 7 and 13. Only the period is lesser, it stays and effects credit score negatively for seven years.
Instead of manual payment for loans left or taken afresh after discharge, try the auto debit mode from your monthly money source (e.g., auto debit from salary), so that you do not miss any premium and risk affecting your crust score.
If you brace up yourself, make timely repayments, take a loan only when necessary, have a mixture of secured and unsecured loan mix, about two years from discharge, your credit score will start showing vertical tend.
David Galler is an experienced bankruptcy attorney based in Atlanta, Georgia. For the last 29 years he has filed over 10,000 bankruptcy cases. He has a FIVE STAR client rating on Avvo, Kudzu.com, RateABiz.com, and Google+, among other sites. Over 99% of all Chapter 7 cases he filed have been discharged.