I'm Bankrupt, But I Want A Home

Steve Campbell took a big financial hit when his company went bust. Campbell and his wife went broke and filed for Chapter 13 bankruptcy, in which they would have kept some of their debts and continued making payments on them.

But Campbell and his wife decided they didn’t like the payment plan. The bankruptcy fell through. Now they’re in even deeper trouble. Had the Chapter 13 been approved and Campbell made all his payments on time, the bankruptcy would have dropped off his credit report after seven years, says Barry Paperno, Credit.com’s credit scoring expert.

But now that he’s filed for bankruptcy, it will do just as much damage as a Chapter 7, which discharges all the debt at once (and which remains on a consumer’s credit report for a full ten years).

So Campbell’s question is simple: Now what?

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“We are currently trying to rebuild our credit and currently renting,” a reader using the screen name “Steve Campbell” wrote in a recent comment. “Can we buy a home anytime soon?”

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“It is possible, but it depends on the rest of his credit,” Paperno says, including whether Campbell is currently behind on any bills, and whether he has any unpaid bills in collection.

It might seem unfair that Campbell’s credit history is doomed to carry the stain of bankruptcy for ten years, especially since he never even finalized the bankruptcy. But there’s a statistical and a subjective reason for that, Paperno says. A credit score is all about using past events to predict whether a consumer will fail repay her debts on the future. On the data side, research has found there’s little difference in default risk between somebody who completed one and someone who didn’t.

On the subjective side, “the rationale is that someone like this person who has gone so far as to file for bankruptcy is still in some pretty deep trouble” even if the bankruptcy never went through, says Paperno.

For Campbell, buying a house may take a while. But that doesn’t mean he can’t get credit now, and use it to boost his score. Here are a few tips for people coming out of bankruptcy (or in Campbell’s case, almost-bankruptcy) on how to move forward. For more information, check out Credit.com’s in-depth story on how to rebuild credit after bankruptcy, here.

1. Get Your Credit Report. The first step is to know exactly what’s holding you back. Are there other problems on your report besides the bankruptcy? Start by getting a copy of your free annual credit report, here.

2. Pay Bills on Time. Just over a third of your credit score is determined by your payment history. One of the fastest ways to boost your score is simply to pay your bills before they’re due.

3. Get New Credit, but Start Small. Campbell may not be able to qualify for a mortgage now. But he probably can get a secured credit card, in which he pays a security deposit. After that, try for a retail store card, and then maybe a personal or car loan.

4. Watch Out for Traps. In this economy, many organizations offer credit repair services. But as Connecticut Attorney General George Jepsen says, many of these outfits are scams. Beware any company that offers to lower your debt in return for an upfront fee. If you decide you do need credit counseling or consolidation, find a nonprofit group that specializes in such work.

5. Don’t Close Anything. Maybe you want to close your credit card accounts and be done with credit forever. Don’t. An often-overlooked part of a credit score is length of credit history, and the longer you’ve had credit accounts open, the better. The problem isn’t the account, it’s the spending.

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Image: bcgrote, via Flickr