Credit Score Repair After Short Sale, Foreclosure, And Bankruptcy

One of my new bankruptcy clients is a credit manager with Bank of America. After discussing his situation and starting his bankruptcy I took the opportunity to ask him how a bankruptcy debtor best establishes good credit after bankruptcy. I also asked about the comparative impact on credit ratings of a short sale, a foreclosure, and a bankruptcy. 

Here are some of his comments and insights based on many years in the credit and banking industry. 

Short sales and foreclosures have similar credit score impact. The main credit problem is not the foreclosure or short sale itself, but it is the borrower’s  delinquent payments. Delinquent payment is the main credit problem.  Because foreclosure take a long time, a foreclosure will result in a long stretch of delinquency. Short sales are completed much quicker and the period of delinquency will be relatively short and therefore, less detrimental. Also, the quick short sale process will start the homeowner’s credit repair earlier than the extended foreclosure. 

Bankruptcy has less credit impact than a foreclosure with extended delinquent payments. My client stated that bankruptcy has its positive aspect which is the elimination of all debt through the bankruptcy discharge. His bank will provide credit shortly after a bankruptcy filing, although the interest rates will be higher to reflect increased risk and past credit history. Repairing credit takes time no matter what you do. The best plan, in my client’s opinion, is to take out new debt as soon as possible and make timely payments for at least a year. A couple years of consistent credit payments will result in an adequate credit score after bankruptcy. Get some credit cards, buy an inexpensive car, or finance something- it does not matter what. Pay the higher interest rate on a small loan to repair your credit. 

My client expects that banks will change their credit standards as the economy improves. So many people have experienced debt problems during the past few years that banks will have too few customers unless they liberalize credit recovery policy. He believes that banks realize that credit problems during the recent recession is less serious than someone who defaults on debt during a good economy.