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Rebuilding Your Credit After Bankruptcy

If your credit wasn�t shot when you filed for bankruptcy and you took my advice about paying off several cards before filing, you�ve probably managed to save one or two cards. There are some other ways to get credit cards that you should know about.

First there is the bank "debit" card. Many banks offer debit cards that look and work just like a genuine Visa or Mastercard with one critical exception. They are not credit cards but are instead debit cards. When you purchase something with one of these cards, instead of sending you a bill, the bank just subtracts the purchase amount directly from your checking account. If there aren�t enough funds in your account to cover the purchase, the transaction is refused. Using one of these cards is exactly like writing a check except that they�re much more acceptable (they can be verified online unlike a check) and the bank gets their cut through the merchants� fees.

Debit cards are quite easy to get. Some banks don�t bother with a routine credit check, as they don�t see much risk here. What have they got to lose? You may have to call several banks but you should be able to find one that will give you their debit card without much fuss. As easy as these cards are to get, they do have several limitations. Some of the car rental companies no longer accept debit cards, so renting a car with a debit card may be a problem.

The most important thing about debit cards is that they don�t report your credit transactions to the three biggest credit reporting agencies so debit cards are of no value whatever when it comes to rebuilding your damaged credit rating.

Another approach is to go after a "secured" credit card. Again, these cards look and work just like real Visa or Mastercards but have a catch. In order to get one, you must deposit a required minimum sum in a savings account with the issuing bank. They usually pay a nominal interest rate of around 5% on your funds while they have them. Unlike the debit cards, your transactions will be posted to the credit reporting agencies so these cards are an ideal way to rebuild your battered credit.

There are a few rules though. First, you must use the card on a regular basis. Just walking around with the card in your pocket won�t do anything for you. The best idea is to run up your outstanding balance to around 80% of the credit limit. This way you�ll pay a lot of interest, which the bank will love you for (the interest rates on these secured cards are very high � usually around 17-19% or even more). Secondly, always make your payments on time. And lastly, never - ever exceed your credit limit.

If you don�t break any of these rules, at the end of the year you should start to receive offers for the traditional un-secured bankcards. You can then apply for one or more and then return your secured card and request that they close your savings account and return your deposit funds (plus your interest). Or you may actually receive an offer of an unsecured card from the same bank that issued you the secured card. That�s what happened to me. It was great. One year later I made one call that cancelled my secured card, closed my deposit savings account and provided me with a brand new unsecured card all at the same time.

Afterthoughts

Some companies actually solicit business from bankruptcy filers. Of course they may demand larger down payments, or higher interest rates but that may be the price you have to pay for credit during the first few years after bankruptcy.

If liens against your property were supposed to be discharged by your bankruptcy, have your attorney check the title to be sure that they were actually removed and that you have a free and clear title to the asset.

Abusing the bankruptcy laws

Here's an interesting twist. Did you know that you don't have to go bankrupt to take advantage of the bankruptcy laws? Several famous people have used the following technique. It may sound attractive but I know the bankruptcy reform people are looking into this particular tactic so this whole approach may soon be illegal.

One politician ran up his debts and when the bills arrived he filed for bankruptcy protection. He then notified his creditors about his filing. This stopped them from pestering him. But rather than going forward with the bankruptcy, he dragged his feet for as long as possible.

After a full year had passed, the judge finally gave the politician a deadline by which he had to submit the required financial disclosure forms.

When he received the court's notification, he quickly started negotiating settlements with his creditors. He offered them a dime on the dollar which they immediately accepted. (They knew that they stood very little chance of recovering any funds at all if the bankruptcy went through)

Pretty slick eh? He used the automatic stay to halt any collection activity and then used the threat of a chapter 7 bankruptcy to pressure his creditors into settling for a dime on the dollar. And the kicker here is that because he never actually completed the bankruptcy process, he can pull this stunt over and over as often as he likes. The six year limitation doesn't apply!