How can I build or repair my credit?

Don't let bankruptcy dissuade you
By: Robert J. Bruss: Inman News
When learning how to build or repair your credit, don't go to those "credit repair" firms, most of which are high-priced scams. But many large cities have non-profit free or very low-cost consumer credit counseling agencies, which can be very helpful to clean up your credit problems.

If you have no credit, force yourself to start building credit. To illustrate, years ago, my dad did that. He and mom were in the habit of paying cash for everything, including the house where I grew up. Yes, mom had department store charge cards, but I remember dad's banker talked him into financing the purchase of a new car to build up his credit. That was a "big deal" around our house. But after about six months, dad hated those monthly car payments so much he paid off that auto loan. However, by then he had started building his credit file. The only major purchase I recall mom and dad buying on credit after that was when they were in their 70s and they bought their condo with a 10 percent down payment and a 90 percent 30-year mortgage (it was one of the rare times they listened to my advice!). Years later, mom (who was the shrewd investor in our family) thanked me for "forcing" the low down payment purchase of their condo, which, dollar for dollar, was the best investment my parents ever made.

The easiest places to get credit cards if you have no credit file are usually gasoline companies and department stores. If you buy a car, finance it – but be sure there is no prepayment penalty if you want to pay off the car loan in a few months – and be sure you finance with a major lender who reports to the credit bureaus. It does no good, for example, to finance your auto purchase at Jake's Used Cars if Jake carries the paper himself and doesn't report to the credit bureaus. Watch out for auto loans that have stiff prepayment penalties. Don't take the dealer's word for this – read the fine print about prepayment before signing the auto finance contract.

If you filed bankruptcy, start rebuilding your credit as soon as you are "discharged" from bankruptcy court jurisdiction. If you filed Chapter 7 bankruptcy and were discharged from all or most of your debts (except secured debts, such as a real estate mortgage), be sure to pay all your obligations on time from now on.

Chapter 7 bankruptcy offers a "fresh start." But that bankruptcy will remain on your credit reports for 10 years. As I write this, Congress is considering a plan to toughen the federal bankruptcy laws, so watch for changes. If you are thinking about filing Chapter 7, my best advice is try to avoid doing so unless you have no other recourse. Although Chapter 7 wipes out most of your debts, lenders and credit grantors will be very hesitant to approve you for future credit.

Because you cannot file Chapter 7 bankruptcy again for at least seven years, some mortgage lenders will approve your application as soon as 12 months after your Chapter 7 bankruptcy discharge. However, you won't get the lowest interest rate! Also, mortgages are secured by the real property so mortgage lenders will eventually get their money, even if you again file bankruptcy in the future.

But Chapter 13 bankruptcy, often called the "wage earner reorganization plan," is different. When an individual files Chapter 13, he or she submits a plan to the U.S. Bankruptcy Court to repay unsecured debts over as long as 60 months. But secured debts, such as mortgages, remain secured by the property.

If a Chapter 13 debtor doesn't keep up payments on secured debts, plus paying the unpaid arrearages as agreed in their wage earner plan, the mortgage lender can get relief from the bankruptcy "automatic stay" and foreclose on the property. Filing Chapter 13 bankruptcy often delays foreclosure loss of the property but foreclosure loss of the property won't be avoided if the debtor doesn't keep up the payments. Having both a bankruptcy filing and a foreclosure loss on your credit report is definitely not good!

Mortgage lenders will not loan to debtors who are still in Chapter 7 or 13 bankruptcy. The reason is the bankruptcy judge's approval is required for the debtor to take on new debt, such as a home mortgage. Also, bankruptcy court approval is required to sell a property while the debtor is in Chapter 7 or 13. However, after discharge from Chapter 13 bankruptcy, there are many mortgage lenders who are willing to make new loans – but not at the lowest interest rate.

Filing Chapter 11 bankruptcy is very similar to Chapter 13 except Chapter 11 is for business bankruptcy. To illustrate, as I write this, U.S. Airways and United Airlines are in Chapter 11 business bankruptcy reorganization to obtain relief from their creditors and to reorganize their finances.

Chapter 11 business bankruptcy is not the stigma it used to be. I know several small business owners who filed Chapter 11 business bankruptcy reorganization and are now doing just fine, much financially stronger than before filing. Whether you consider Chapter 7, 11, or 13 bankruptcy, please consult several bankruptcy attorneys before proceeding because your credit will be at least temporarily ruined.