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Be Extra Careful With Your Credit After A Bankruptcy
Most of the loans for people with bankruptcies on their credit
reports typically fall into a standard description; most
likely the borrower was self-employed, had good credit,
something bad happened, then the bankruptcy. Rarely do I see a
bankruptcy on a credit report that reflected a general
disregard for the credit system altogether. That means a
steady history of bad pays, judgments and collection items.
No, most bankruptcies are isolated events. There was good
credit leading up to the bankruptcy (that's how the borrower
got credit in the first place) and good credit after the
bankruptcy.
It used to be thought, and for some it unfortunately still is,
that someone with a Chapter 7 bankruptcy on their credit
report would nix their ability to get a home loan. Many years
ago, that would have held true, but of course today most FHA
loans ask for a minimum of just two years to have passed since
the discharge and conventional product asks mostly for four
years to have gone by. As do most other loan types. Let some
time pass between the discharge and the home loan application
all the while re-establishing credit, one account at a time.
If the borrower with an old bankruptcy does establish good
credit over a 24-36 month period then that person can expect
to find the best rates available. But one little slip-up
during that re-building period can be a killer.
I had a client that refinanced her home last summer. She had a
bankruptcy, but it had long since been discharged in 1999 and
she had re-established her credit by opening up some trade
lines and paying her bills on time. Every time. Even though
her credit report showed a bankruptcy discharge just a few
years ago, she got the best interest rate I had to offer. No
big deal there. Last week, she called me up and found a new
home to buy, and could I get her a pre-approval letter to
accompany her offer.
I re-entered all of her old data from her previous file,
entered in the new sales price and down payment and submitted
the loan electronically for an approval. After a couple of
minutes had passed, I got my answer: no approval. That puzzled
me because just a few months earlier she got an approval
almost instantly. Something must have changed.
I pulled her credit report and scanned her trade lines. No
late mortgage payments or car payments and all of her credit
cards were showing as having being paid on time. Then I found
the problem: a collection account that appeared just this
month. No, not a huge collection, the amount was just under 90
bucks, but a collection account nonetheless. Wham! Her credit
scores were instantly socked by over 90 points compared with
her loan last summer.
Here's the real kicker about bankruptcies and credit scores: a
bankruptcy by itself, while damaging, is not life threatening.
One can always re-establish good credit in a relatively short
period of time. But combine a bankruptcy with any subsequent
negative item whatsoever and the result is seriously damaged
scores. If it were just the bankruptcy or just the collection
account, the scores wouldn't have been damaged but would have
continued to slowly improve. In fact, people get great rates
with unpaid collection accounts appearing on their credit
report every day. The sad part about this story is that the
client knew about the collection account but refused to pay it
on moral grounds. She thought her doctor was “double dipping”
her and her insurance company so she refused to pay the doctor
twice. However it turned out, that $87 collection account
turned her away from a conventional loan and instead she had
to take a slightly higher rate in the form of a sub-prime
loan.
Know this: if you've had a bankruptcy it's all the more
important to keep a clean credit profile. Any slip-ups can
wipe out your ability to obtain the best rates in a matter of
seconds. If there is a dispute about a credit account, deal
with it directly and don't ignore it. If not, it's your score
that's hurt.
Published: July 2, 2004
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