Interviewer: Okay. All right, so I know we basically went through making sure that everything that should be discharged has been discharged on a credit report. What else could people do to make sure their credit is in good enough shape to continue or rebuild?
Andrew Campbell: Right. Here’s how, just so people know. Your credit score is influenced by different factors. One of the biggest factors, and it is about thirty to thirty-five percent of the score, is your debt-to-income ratio, so if before you file you’re earning forty thousand dollars and you’re single but you have eighty thousand dollars in debt, once your discharge occurs the debt is reduced to maybe ten thousand dollars. Maybe you kept a car and you reaffirmed that debt, which means you simply agreed to keep paying it legally and to be legally bound to continue paying it, but that’s a good thing for a car if it’s a good car because that car payment will continue to be reported. One way to really improve your score after bankruptcy is to keep paying on time on an installment loan.
Interviewer: Okay. Can you clarify what you’re saying then? What are the ways to build someone’s credit back up once they’ve filed bankruptcy?
Andrew Campbell: Okay, about the debt-to-income ratio: you get a discharge, on the date of your discharge now your debt falls from eighty thousand down to ten thousand, so your credit score then will pop up because now your income has stayed the same forty thousand dollars but your debt has now dropped by seventy thousand. So your ability to pay has actually improved because you’re not legally obligated on any of those debts anymore. Those debts will still exist, but you’re just not legally obligated on it, so that’s a really very important thing for people to understand. The score will pop up upon your discharge.
The score may drop a little bit when you actually file, but it will pop up later. In fact if you’re interested in knowing what happens to your score you should get onto Credit Karma, which is a site that allows you to look at your credit score –not just your credit disclosures, but your credit score.
Andrew Campbell: Yeah, there’s no credit card required and I think it’s one of those programs that you’re going to want to get a program that you get a free period of time to use it before you’re charged, but Credit Karma doesn’t require a credit card so you can’t automatically be charged. You can go on there and check out what your score is. There’s also boxes for you to check hypothetical situations like, what would your score be if you filed for bankruptcy? What would your score be if you paid off all of your credit card debt?
I’ve gone in there and checked that and I remember checking and I had something like a seven fifty-five or seven sixty credit score which is pretty good and they said if I paid off all my credit cards my score would pop to seven ninety-five. I was curious because I do so much bankruptcy work, so I checked what would happen if I filed for bankruptcy. They said if I file for bankruptcy my score only dropped a hundred points, so I want to tell that to my clients. It wasn’t the end of the world if I had to file. It would have still been six fifty which is not great but it’s still somewhat decent.
Andrew Campbell: It’s not going to be the end of the world if you do file for bankruptcy. Your score will take a hit initially and then, like I said,the debt-to-income ratio will influence it and upon discharge it should pop up. That’s one way. The second way is if you reaffirm debts, which you shouldn’t do unless you’re really, really careful. But if you’ve got a car loan and it’s a good car that’s reliable and you want to keep it, then reaffirm it, pay your debt on time, and make sure it’s being reported. That’s another thing to check in your credit report – check and make sure that your reaffirmed debts are being reported and you’re paying them on time. Also you should look into getting a secured credit card, not an unsecured.
Most credit card companies can’t simply start taking vehicles or taking money from your account or garnishing you without suing you first. Why? Because the debt is unsecured. There’s nothing to attach. They have to go to a court first, but secured credit cards are cards where you apply and there’s an annual fee and there’s a deposit that you make. For example, you pay three hundred dollars and you get three hundred dollars worth of credit, plus you pay sixty dollars a year in an annual fee. You use that card very, very carefully and you have the three hundred dollars on deposit to pay it if you don’t pay it and that kind of gives the credit card companies more assurances that you’ll actually pay.
If you use that credit card properly and let a balance stay on there for a month, pay it off and then use it, pay the minimum payment the first month and then pay it off the second month and keep using it like that where you do have some kind of balance for a little while and then that’s paid off and you just keep using it – that will increase your score. That is another way to increase your score.
Interviewer: I’ve heard of going to a credit union and depositing a thousand dollars for instance, and then taking out a loan against that thousand so you get your money back but you’ve got to make payments to yourself essentially and because they report to the bureaus it’s a good way to establish a line of credit.
Andrew Campbell: Yeah. I haven’t heard of that. That’s another good way to do it, as long as you know that the credit union does report to the credit bureaus – make sure that you do check that first.