LIFE EVENTS WILL AFFECT YOUR CREDIT SCORE (Part 3 — Bankruptcy); OR HOW TO RECOVER FROM EXCESSIVE DEBT!
The trick is to know what should be in place to maximize the best outcome for all involved.
Lets cover Bankruptcy (BK) now. By the way, our clients don’t go to BK unless we send them there with the best attorney we have found in Texas.
Starting with a very bold Statement; CHAPTER 13 is no longer an option in a FICO System Era! If you can’t see your way clear to pay-off your debt with 50% of your gross income within a 5-year period then Chapter 7 may be an option. Anything less, and there are much better options to consider. And Debt Consolidation Companies, or Debt Management Programs are not on the list either; these people ruin your life. If you don’t understand this just call me for further explanation.
A Chapter 7 BK discharges the debt, so it will not have to be paid back to the creditors. This will affect your Credit Score in the near term. What you need to do to improve things quickly is start to establish new credit the day after the Courts Release the BK. Do this with a Secured Credit Card and a Secured Loan against savings. In most cases I talk in terms of $500 Credit Line, and a $1,000 loan. It’s easy to do with a credit union.
Use of the credit line is for those things you currently use your Bank’s Debit Card; buy gas and groceries. Make your payment on this account a couple days before the Statement Ending Date. There are two schools of thought about this payment. Some believe you should carry a balance of from 1%-30% of the credit limit, and others feel it is not necessary to carry any balance. Understand this: the balance on the account is reported to the bureaus the day after the Statement Ending Date, and if this balance is more than 30% of the credit line it will likely affect the credit score. Four-months into this program apply for a Rewards Credit Card. Split the usage of the two credit lines; one for gas, one for groceries.
The last person I sent to BK posted a wonderful review for me which I turned into a Blog Post. I believe he was Post BK Release about 20-months when he came to see me again. We looked over the Credit Profiles to verify that what he was doing would give him the best resulting credit score at two-years, so that he could buy another home. He told me his score was already at 685. He was well on his way to a 700 credit score within 2- years of declaring bankruptcy.
To better understand these credit matters, and many other things to consider, order your free annual credit reports via the toll-free FACT-ACT program at 1-877-FACT-ACT (322-8228). The reports will show up in your mailbox in about two weeks. Contact us to make an appointment to do a Profile Review. This review could save you thousands of dollars over a very short period of time. For a Mortgage / Credit Score Analysis Click Here