One of the biggest concerns in contemplating the filing of a Chapter 7 bankruptcy is how to go about reestablishing credit after the discharge is (hopefully) received and the bankruptcy case closed. Of particular importance is that the debtor regain the ability to qualify for a car loan and, ultimately, that he or she might in the not too distant future qualify for a mortgage loan. Here are some relatively simple steps to help achieve those goals:
1. Start small, but steady: As soon as your case is closed, apply for a credit card with a very low spending limit. Even if that limit is as modest as, say, $250, this fact is much less important than the fact that you must stay completely current on the account. Meaning that you should not merely make the minimum payment every month; rather, you should pay the entire account balance in full, and well before the due date. This will help you establish with the credit reporting agencies a track record of repaying debts reliably and on time.
2. Don’t overdo it: Having established a good track record, you may soon find that banks are willing, and perhaps even eager, to increase your spending limits. Resist the temptation to go along. Remember, that’s what got you into a mess the first time around. Don’t let history repeat itself.
3. Negotiate lower rates: As your repayment record improves, you should also find that banks are willing to consider offering lower interest rates to you. Occasionally, lenders will do this automatically, but for the most part you’ll need to be proactive and make the request. Always remember that credit terms are negotiable, and should be treated as such.
4. Move up to a car loan: After a year – maybe less – of steady, on time payments on your credit cards, start shopping around for a car loan. Don’t allow yourself to become discouraged – some dealers will insist upon a longer period of solid repayment history before considering you, but keep in mind that it’s a competitive market and that there are also lenders who are more than willing to deal with recent bankruptcy filers. Although your initial rate may be high, remember that you can always refinance later – again, this will be made possible by a good repayment record on the car loan – at a lower rate.
5. Finally, a mortgage loan: Once you’ve got a solid track record on both credit cards and a car loan, you’re within reach of the ultimate goal – a mortgage loan. Again, some lenders will have a ‘look-back’ period of as long as 4 years, but others, particularly those originating FHA-guaranteed loans, will loan to applicants with bankruptcies as recent as just 2 years ago.
So you see, recovering from a bankruptcy isn’t as difficult, and needn’t take as long, as you might have feared. Your bankruptcy attorney may have additional ideas or suggestions in this regard and of course, you should always be sure to seek the advice of an experienced bankruptcy attorney before you decide upon a course of action on this or any other bankruptcy issue.
David Romito is an Attorney based in Pittsburgh, PA. He handles Chapter 7 Bankruptcy matters in the Western District of Pennsylvania. For more answers to your Chapter 7 Bankruptcy questions, please visit his website at
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