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Clearly you are a better credit risk as you exit bankruptcy because you have little or no debt and you are not eligible to file another bankruptcy for 8 years. Not only is your risk of default reduced but you won’t have the bankruptcy option if you do go into default.
Our experience has been that you will need about 6 to 12 months before your credit recovers enough to permit you to qualify for a mortgage or a car loan. Credit cards are much easier to get, although you may have to start with a secured card that will turn into an unsecured credit card.
Because there is no risk to a secured lender that you will file another bankruptcy anytime soon, you become a good risk for a loan, especially for a loan secured by collateral such as a home or car.
Often, the problem you will face post Chapter 7 will be the absence of any credit. As soon as you can establish some credit - perhaps with a credit card or personal loan - you will become eligible for a real estate or motor vehicle loan.
After your Chapter 7 discharge is issued, you are a much better credit risk than you were the day before you filed bankruptcy. First, all of your debt is gone - there is no problem with your debt to income ratio and, presumably, your household budget is now in the black.
Second, following discharge you are legally precluded from filing another Chapter 7 for eight years. This limitation on filing bankruptcy makes you a much more attractive customer than your next door neighbor, who could presumably file Chapter 7 tomorrow.
Believe it or not, we often receive credit card solicitations to pass along to our clients even before the Chapter 7 discharge is issued. Not every credit card issuer takes such an aggressive approach but you will be able to find post-bankruptcy credit card credit in a matter of hours if you so choose. And remember, once you have established and paid timely on a new credit card account, you will be opening a door to qualifying for a mortgage or car loan in short order.
As a general rule, you cannot open any new credit accounts while in Chapter 13 unless you get special permission from the bankruptcy judge. You will also need to find a lender who will extend credit.
We have successfully represented clients who needed to finance motor vehicles (to replace a vehicle destroyed in an accident) and clients who needed to purchase or refinance a home. These “in bankruptcy” loans require a lot of paperwork and your outcome will depend on the unique circumstances of your case.
Once you get your Chapter 13 discharge (after paying into your plan for 5 years), you will find that your credit will bounce back within 6 to 12 months. Our experience has been that Chapter 13 debtors will see their credit come back a little faster than Chapter 7 debtors but, again, you will be out of the new credit universe for 5 years when you start to apply.
Chapter 13 differs fundamentally from Chapter 7 in that Chapter 13 functions as a payment plan. However, the amount that creditors get paid under a Chapter 13 can range from 1 penny on the dollar to 100 cents on the dollar (full repay). Generally the closer you are to a 100% plan the faster your credit will bounce back.
If you are paying an ongoing mortgage payment or vehicle payment as part of your Chapter 13 plan, your credit reports will reflect those on-going payments. When your Chapter 13 ends and you apply for credit, these current, on-going payments will help qualify you for unsecured credit.
Finally, note that any reference to Chapter 13 will come off your credit report 7 years after the date you file Chapter 13 bankruptcy. The 5 year term of your Chapter 13 plan counts towards this 7 years so about 2 years after you receive your Chapter 13 discharge your credit report will not reference bankruptcy at all.
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