Rebuilding credit is not an overnight process, but it can be done sooner than many think possible. And yes, this can be done while one is making monthly payments in a Chapter 13 Bankruptcy Plan. Done properly, the credit rebuilding process requires a little less than a year to establish good credit. So take a breath, be patient and do it right.
Always keep in mind that just because you can begin rebuilding your credit while in Chapter 13, this does not mean you are outside the jurisdiction of the bankruptcy court. You will need to get authorization to incur new debt, such as for the purchase of a vehicle or a home or the refinance of a home mortgage. Providing you reside in a Bankruptcy Court District, for example the District of Colorado which allows for revesting in the Chapter 13 Plan, it is less of a hassle with the smaller stuff which is really key to rebuilding your credit. More on this below and in other of my blogs.
Before you can begin rebuilding credit, your Chapter 13 Plan must be confirmed by the Court. Discuss the confirmation process with your bankruptcy attorney. You do not have a confirmed Plan just for having filed a Chapter 13 bankruptcy.
The Basics of Building Good Credit Scores
Given that you want to rebuild your credit, it is essential that the basics of credit scoring be understood. Key to this is the balance of your available credit against revolving credit (credit cards). As discussed in this blog, it is perfect to not have more than 10% of your available credit in use in any given month. It is ok to have up to 20% of your available credit in use, but advisable to pay the balance down to 10%. For example, if one has available credit of $1,000, for best results, one would have no more than $100 (10%) charged during any given month. One would never have more than $200 (20%) charged against the $1,000 available credit limit.
The Chapter 13 Payment
More often than not, I see a late payment made to the Chapter 13 Trustee. This is a deal killer at worst or a delay at best. To learn more of the importance of this payment, you will wish to understand the facts which are discussed in my blog titled: The Chapter 13 Payment.
You Must Use Credit
Rebuilding and maintaining good credit require that you use credit. Yes, to have good credit you must show that you can use it wisely. On this, you will do very well in rebuilding your credit by maintaining a small balance on your credit card(s) and paying minimal payments. You are, in a sense, buying your credit back. Keep in mind, you need to keep a small balance on your credit cards and not pay off the entire amount monthly. Pay on time or pay early, never late. Once you have scores above 740, it is fine to pay off the balance monthly.
Rather than spending your money when you charge something, take a cash advance and put it into your credit union savings account. Read on for more about how and why to use a credit union to help you rebuild your credit and raise your credit scores.
Beware of Ignorance and Prejudice
Unfortunately, there are many folks who have a prejudice against those who have had to file for bankruptcy protection. This includes the folks working in credit unions today. Most credit unions allow one who is in a Chapter 13 bankruptcy repayment plan to obtain a secured credit card. Many, but not all, credit union employees understand this. For example, I called a nearby credit union today and was told by the person responsible for establishing a secured credit card that my client must have been Discharged from Chapter 13 for two years before she could be eligible for a secured credit card. Next I called a nearby branch of this same credit union and spoke with the person responsible for establishing a secured card. He stated that all my client must do is to become a member and make the appropriate deposit. He further explained that since this was to be a secured credit card, that a credit report would not be needed. The fact is whether you think you can or can’t you’re right.
Patience is Key and Being Polite has Rewards
Your success in setting up the secured card with the credit union depends upon which clerk, which location, and what mood they are in. Patience is an integral key to accomplishing your goal. First, open your savings account. In a credit union this is called a Shares Account. Be smart, take time and build a new ‘banking’ relationship while you are building your Shares account. Save at least $1,000 before asking to open a secured credit card. I strongly encourage that you read this blog titled Credit Union Power to learn how these “non-bank’ banks can be superior to traditional banks for those wishing to rebuild credit. Among the ways they are are different from banks in that as a member you become an owner. This is different from just being a customer. On this blog, you may also search for nearby credit unions which you can join. This information is good throughout the U.S.
There are also other secured credit cards available as referenced in this blog. However, very few have zero fee cards with minimal interest such as credit unions. Several of the dry goods stores such as Kohl’s and Victoria’s Secret also offer credit cards to those wishing to rebuild their credit. These, too, have the same rules regarding the usage of credit against the credit limit (10% best – 30% max).
Anyone who uses credit cards could have high utilization, particularly those which pay off their balances in full each month. This is because balances are often reported to the credit bureaus mid-billing cycle. So if you have a $5,000 limit and you charge $4,000 in a month, you could be reportedly utilizing 80% of your available credit. The result is most often dramatically reduced FICO™ Scores. The higher the limit the better!
Home Loan Refinance While in Chapter 13
Providing you have only a first mortgage, you can, in many circumstances, refinance your mortgage to a lower rate and payment while in Chapter 13. For information on how to do this, start with this blog on the subject. One of the conditions is that a second mortgage is not being stripped in the Chapter 13 Plan. In this case, the Plan must be completed prior to a refinance. Once the Chapter 13 Plan has been completed and discharged, it is necessary – in the vast majority of cases – to wait two years to purchase a home or refinance a mortgage. It is much easier to refinance while still in Chapter 13.Good Credit: Image attribution Pie Chart: Image attribution Financially Speaking™ James Spray, MLO, CNE, FICO Pro CO LMO 100008715 | NMLS 257365 | April 15, 2012 | Rev. July 16, 2015
Notice: The information on this blog is opinion and information. While I have made every effort to link accurate and complete information, I cannot guarantee it is correct. Please seek legal assistance to make certain your interpretation and decisions are correct. This information is not legal advice and is for guidance only. You may use this information in whole and not in part providing you give full attribution to James Spray.