When New Yorkers take on debt to the point where making monthly payments becomes too overwhelming, they may file for Chapter 13 bankruptcy. This type of bankruptcy allows consumers to reduce credit card debt by making manageable payments over a five-year period. But when it comes to rebuilding credit, it can be a Catch-22.
Consumers need to apply for new credit cards in order to rebuild credit, but at the same time, lenders are scared to extend credit to those who are going through bankruptcy. Although approval is possible early on in a Chapter 13 bankruptcy, sometimes the most useful tip is to wait it out.
Debt eventually declines as consumers pay it off. This results in a higher FICO score, which makes consumers more attractive to lenders. This takes time, though. Approval for a new line of credit won’t happen overnight. There will be rejection, so it’s important to take everything in stride.
For those who want to try securing credit right away, a secured credit card may be the way to go. A consumer puts down a certain amount of money — typically several hundred dollars — as collateral and this determines the card’s credit limit. So if a consumer puts down $500, the credit limit is $500. The problem with this, though, is that after a bankruptcy, a consumer rarely has several hundred extra dollars to put toward a credit card.
After a bankruptcy, people’s credit score is hit hard and almost all the money they bring in as income is given to creditors. Once consumers have reduced credit card debt significantly — after a year or so — they may want to check their score and keep applying. By making timely payments, they will eventually gain the trust of a lender.
Source: FOX Business, “During Chapter 13 Bankruptcy, Secured Cards Tough to Get” Erica Sandberg, May. 06, 2014by