When I first began applying for credit after my bankruptcy I noticed a trend.
Lenders would ask me the same series of questions over and over again. They all seemed to care about a few key things. Of course, now I realize they were trying to quickly assess if I was creditworthy or not.
You see, after you file bankruptcy, lenders will be very cautious when considering if they should extend you credit (and rightfully so).
Can you blame them?
After bankruptcy your number one mission is to prove to lenders you’re now a low credit risk.
So what do they want to see from you? The right answers to the following six questions.
Question 1: Are You Discharged?
The first thing a lender will need to confirm is if your bankruptcy is discharged. Or, in other words, if your bankruptcy is complete.
The reason lenders want to know that you’re discharged is because if your bankruptcy is still “open,” then you could technically still add accounts to your bankruptcy (including the lender you’re applying with). Not many lenders are going to grant you credit when you still have the ability to include them in your bankruptcy.
Make sure you don’t confuse the term “discharge” with the term “filing.”
Hopefully you’re not one of the poor saps who’ve had a bankruptcy dismissed.
Having a dismissed bankruptcy is bad, bad, bad. You basically receive all the negative effects of filing bankruptcy-but none of the benefits-since your bankruptcy was not completed.
It’s like paying off one of your collection accounts…then realizing the collection account remains on your credit reports. So your FICO credit scores don’t increase at all. They stay the same.
But there’s hope even if you’ve been dismissed. So don’t throw in the towel just yet. Life’s a garden-dig it …plant some seeds of hope…and watch as you prosper…You can still start the process of increasing your credit scores.
Question 2: When was your bankruptcy discharged?
This is very simple.
The more time that has passed since your discharge-the better.
You see, each lender has different credit guidelines. A lender’s credit guidelines are essentially their minimum requirements that you have to meet in order for them to approve your application.
For instance, you won’t be able to finance a new car through a low interest lender until you’re discharged. Being discharged is a basic credit guideline when financing a car after bankruptcy.
Getting approved for a secured Visa® or MasterCard® is relatively easy. Just being discharged and sending in your deposit are the two most important criteria.
Unsecured credit card lenders’ credit guidelines vary. Some lenders won’t touch you until the bankruptcy no longer shows up on your credit reports. If you discharge debt with some lenders, you’ll never get another card with them until that debt is paid back (e.g., American Express®). There are lenders that will give you a second chance-but it won’t be soon after your discharge (so don’t hold your breath).
Mortgage lending requirements are more complicated. How much time you have after your discharge will determine what type of mortgage financing you qualify for.
Anything less than 24 months after your discharge and you’re considered a sub-prime borrower. If you have more than 24 months after discharge you may qualify for more conventional mortgage programs.
Chapter 13 filers have even more options for getting a mortgage after bankruptcy, most of which are determined by the amount of time since your filing date.
So keep track of how long it’s been since your discharge. Or if you filed Chapter 13, how much time since you filed. They are important dates to memorize.
Question 3: How have you paid your bills since your discharge?
Late payments appearing on your credit reports after a discharged bankruptcy are kisses of death.
Some lenders even consider 1 day late after the due date to be enough for them to report a 30-day late payment to the credit reporting agencies. The reason is that technically, they count everything in the 1-30 day late payment range the same. So even being one day late could burn you.
Bottom line-don’t be late. Pay early, worst case on time. You simply cannot afford to be late.
Lenders will look to see how you’ve handled your credit since your discharge.
And if you think late payments hurt you…collection accounts, judgments, and other nasty things like those will haunt you much more.
You need to be able to tell a lender that you’ve paid everything early or on time since your discharge. When they review your credit reports they will see what you’re saying is true.
Question 4: Have you reestablished new credit since your discharge?
Avoidance is not recovery.
Although it’s good if you reaffirm a few credit accounts through your bankruptcy, it’s even better if you can show lenders that you’ve established new credit since your discharge.
The types of new credit you need to aim for are:
– Home mortgage
– Car loan
– Car lease
– Credit union loan
– Bank loan
– Overdraft protection
– Credit card
– Retail credit card
– Gasoline credit card
– Home equity loan
– Student loan
The catch-22 is that the lenders you really want to work with don’t really want to be the first ones to grant you credit. It can be frustrating trying to open that first account-which is why you need a strategic plan of attack. In other words, don’t apply for a business loan (which can be tricky to get) if you can’t even qualify for a secured credit card yet.
But it all starts with you. I’m saving you months-even years-worth of trial and error. But you have to take the information and put it into action. So get to it!
You simply will not recover unless you jump back into the fire and prove to the world you can manage credit effectively.
Question 5: How much do you have for a down payment?
It will be necessary in most cases to be able to come up with a down payment or deposit. So start saving! Lenders don’t take food stamps, or post-dated checks.
As a general rule of thumb, if you made all your payments as agreed on your last car, you should plan on no more than $500 to finance a new car at a normal interest rate…that is IF you follow what I teach in the free Credit After Bankruptcy seminar.
On the other hand, if you missed or made late payments on your last auto loan, your only option will most likely be 20% down at a high interest rate through a finance company.
If a car dealer is telling you to come up with more money, you’re either at the wrong dealer…or you need to wait until you’ve reestablished your credit a little more.
If you want a good secured credit card-plan on depositing around $250 to $500. There are some secured credit cards that you can get that have lower deposits, but I don’t recommend them. Most of the lower-deposit cards have hidden fees…don’t report to the credit reporting agencies properly…and usually have higher interest rates to boot.
A down payment on a home will obviously depend on the amount of the mortgage. Although 3% to 10% of the purchase price is considered the norm-it’s more than possible to get a mortgage for no money down. And I’m not talking about some crazy television infomercial that’s promising you the world. I’m talking about real, bona fide mortgage programs.
So be prepared. Have a little money down to show you’re a playa.
Question 6: What are your credit scores?
Of course you knew this was coming, right?
Back when I was recovering from bankruptcy, credit scoring was just starting to become popular. You couldn’t even purchase all 3 of your credit scores before 2003.
Today credit scores are used by nearly every lender in the United States and Canada.
If you don’t know your FICO credit scores-you should.
Most important, you need to know which credit reporting agency has your…
…HIGHEST credit score
…your MIDDLE credit score
…and your LOWEST credit score
To gain the most leverage over any lender you should choose to work with the lender that uses the credit reporting agency that has your HIGHEST FICO score. This way you receive the lowest interest rate and best terms.
A Final Note
So there you have it. The six questions lenders will ask you after bankruptcy. Like my scoutmaster taught me many years ago…be prepared.
Chance favors a prepared mind.