When a debtor files a Chapter 7 bankruptcy, he is usually doing so in order to put himself back on a sound financial footing. He is not merely just paying an attorney some money to get rid of some debt. For the debtor, an important part of getting back on a sound financial footing is being able to obtain new credit. If properly done, the debtor should be able to obtain new credit after filing a bankruptcy, so long as he has a steady income. This is because once he files a Chapter 7, the debtor cannot refile another one for 8 years plus one day. So if during that time he gets into trouble and cannot repay, the new creditors can garnish his wages.
There are three types of credit that the debtor should look at getting once he files for Chapter 7 bankruptcy. They are getting a new credit card, financing for a vehicle, and financing or refinancing a mortgage.
The first is getting a credit card. The way our society is structured, an individual must have a credit card. The growing trend of shopping online requires a credit card. Traveling within or outside of the country necessitates a credit card as one cannot book a hotel room or rent a vehicle without a credit card.
There is nothing wrong with obtaining a new credit card once a bankruptcy is filed. We encourage it. What is plenty wrong is obtaining multiple new credit cards and carrying balances on these new credit cards. When an individual carries balances on multiple credit cards, he is really trying to live “beyond his means”, spending more than what he can afford (which is why he is unable to pay off his monthly balances). An individual should have only one credit card, and the balance on that credit card should be paid in full every month. A credit card is for convenience, and not a way to live beyond your means.
The second type of credit a debtor usually requires is vehicle financing. Unfortunately, living in Michigan requires having reliable transportation, as reliable public transportation is virtually non-existent. Almost everybody needs a vehicle. As long as the debtor has a steady income, he will be able to finance a vehicle once he files a Chapter 7 bankruptcy. Where he will “take the hit” will be on the amount of interest he has to pay to finance that vehicle. Due to the bankruptcy filing, the debtor will be required to pay a much higher interest rate than if he had never filed for bankruptcy. However, the higher amount paid due to increased interest rates is more than offset by the amount of debt eliminated in the bankruptcy.
The third type of credit a debtor might need is mortgage financing if purchasing a house, or refinancing an existing mortgage. A body of federal law called the “Real Estate Settlement Procedures Act” (RESPA) governs this area. RESPA dictates that a debtor must wait a minimum of 2 years from when the bankruptcy is over before he can qualify for a mortgage. Once the two years are up, provided he otherwise qualifies (having the appropriate income and down payment), the debtor should get the mortgage, and he cannot be charged a higher interest rate than what a person who never filed for bankruptcy would pay.