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Why it can be hard to rebuild credit after Chapter 13 bankruptcy


It can be easy for Tennessee residents to get discouraged after filing for Chapter 13 bankruptcy. Unlike a Chapter 7 bankruptcy, in which debts are wiped, Chapter 13 bankruptcy requires payment plans based on the filer's income. This may make applying for a new credit a challenge, since many credit card companies may shy away from applicants with a history of late payments and defaults.

After filing for Chapter 13 bankruptcy, many consumers want to start rebuilding credit right away. Although this is a good idea, securing credit after bankruptcy is not always easy. Lenders are looking at consumers' credit rating as well as how much they can afford. After a bankruptcy, a consumer's FICO score can drop dramatically. This is especially true for Chapter 13 bankruptcies, which can last five years.

In addition, lenders look at consumers' income compared to debt. If all the money a person is earning is going toward a repayment plan, then there's not much left to go toward paying off a new credit card.

However, the reality is not as dire as the rumors surrounding bankruptcy. Credit scores do go up eventually, especially if a person is paying off debt in a timely manner. This will arouse some interest from credit card companies. In addition, a secured credit card can help build credit. This requires the consumer to put some money as a down payment, which is used as collateral as well as the card's credit limit. So if a consumer puts down $500, that becomes the card's credit limit.

Although a credit history is vital in today's society, it's important to use debt responsibly. Obtaining a credit card and making payments on it in a timely manner is a crucial step toward financial freedom and can be achieved gradually after filing for bankruptcy. It's also important to rebuild savings accounts and check credit scores every year in order to spot errors.

Source: FOX Business, "During Chapter 13 Bankruptcy, Secured Cards Tough to Get," Erica Sandberg, May 6, 2014

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