Last week, I wrote about the challenges of accessing credit after filing a Chapter 7 Bankruptcy case. I concentrated on retail charge cards and revolving credit cards as two commonly-desired credit products that can be accessed after a bankruptcy case has been filed, and the debtor has received a discharge. This week I will look at the mechanics of obtaining approval for credit cards. Then I will look at the challenges of larger credit products - particularly vehicle loans and real estate mortgage loans.
Getting the Revolving Credit Card
Here’s an ironic twist in an ironic world: many of my clients file bankruptcy cases because they have overwhelming credit card debt. Revolving credit card debt is efficiently discharged in almost all Chapter 7 Bankruptcy cases. Many of my clients find that they are deluged with offers of new credit cards after they receive their bankruptcy discharge.
There are several reasons for this - and the reasons are very similar to the reasons retailers are willing to issue cards to recent bankruptcy debtors: the issuer can keep the credit limit relatively low, the card issuer wants market share and market share is achieved by issuing cards, and the Chapter 7 debtor with a recent discharge cannot file another Chapter 7 Bankruptcy case and receive a discharge for another eight years - so if there is a default on a card, the recent bankruptcy debtor doesn’t have Chapter 7 protection available to her.
My general rule of thumb is that, unlike retailers, who are often ready to issue cards to a debtor shortly after discharge, there is usually a wait from the time of discharge to the time that a bankruptcy debtor will be qualified for a revolving credit account. Most of my clients are looking at about a six-month, to twelve-month wait after their bankruptcy case is filed before they qualify for a MasterCard or Visa. That isn’t always the case, though, and if one of my clients is interested in obtaining a credit card sooner than that, and they have an offer from a card issuer, I tell him or her that they can apply. However, I tell my clients that while the chances are good that they will qualify for credit cards that are, after all, soliciting them to apply, there’s always a chance that their application will be denied. And if it is denied, that is negatively reported on their credit report.
So I tell my clients it’s not a bad idea for them to position themselves as favorably as possible if they decide to apply for a revolving credit account. The first step, I think, is to obtain a retail charge card. MasterCard or Visa is more likely to qualify a client for a revolving credit product if the client has already obtained in-store retail credit.
If the client has a retail card, I strongly recommend that the client use the retail card regularly, and always pay the outstanding balance in full each month. A good track record with a retail charge card will help an application for a revolving credit card.
Using the Internet to Position Yourself for a “Yes”
Clients should also take advantage of web sites that try to “match” certain credit cards with certain clients. A web site called CardMatch can help clients find credit card products that they qualify for. Card Match will do a “soft pull” of a client’s credit report (that means the request for a credit report will not result in a lower credit score) and will then find financial institutions that will likely be willing to extend a revolving credit card to a client. Again, using a web site such as Credit Match enhances a client’s chances of success. That’s always a good thing.
A Word of Caution
Getting a revolving credit card after a bankruptcy discharge is a good thing, on balance. So many of my clients become my clients because they have credit card balances that got out of control. So for the recently-discharged client, I think using the revolving credit card infrequently and modestly is the best policy. I advise clients to use the credit card as a tool for improving a credit score; not as a high-interest line of credit to purchase unnecessary “extras.”
Just like retail cards, once obtained, I advise clients to use revolving credit products regularly, but modestly, and to pay off balances in full (if possible) every month.
Getting the Car Loan
When I review credit access with clients who are considering Filing a Chapter 7 Bankruptcy Case, I usually review with them the “wait times” that clients typically experience with respect to retail and revolving credit, new car financing and home mortgage financing. When it comes to used car financing, though, I tell them there is no wait time - that a bankruptcy debtor that needs to finance the purchase of a used car can find someone to finance him even while his bankruptcy case is pending(!). The reason for this is that unlike credit cards, which are underwritten by banks (subject to examination by bank examiners), and new car financing, that is underwritten by institutional lenders and car manufacturers (again subject to examination and review by a board of directors and shareholders), used car financing comes from many sources - and the profiteers in the finance world love used car financing. High-risk borrowers are charged an interest rate that can reach more than 20% a year. So high-risk loans, if they pay, are very profitable for lenders. And if the loan goes into default? Then the lender can repossess the car, and sell the car to the next high-risk borrower. High interest car loans make sense for a lot of financiers, so bankruptcy debtors usually have a financing option on used cars that may not exist for other forms of credit.
That doesn’t mean that bankruptcy debtors should want to borrow money at high interest. The better course is to hold out on financing a vehicle for as long as possible. If a debtor can wait for at least twelve months after filing a chapter 7 case, the debtor will see much lower interest rates for vehicle loans from reputable lenders. And the longer the wait, the lower the interest rate.
Once a car loan has been obtained, the same repayment rules apply as credit cards - make a full payment on the car loan, and make the payment on time. Over a period of months, timely, in full, payments will be reported favorably, and the next loan a discharged debtor is looking for will be that much easier for which to qualify. We’ll look at that aspect of credit next week.
