I just closed a loan for a couple who had both experienced a Chapter 7 bankruptcy. Not together, but separately. They were both forced to file for a bankruptcy before they even met one another, and both due to serious accidents and mile-high medical bills. With all these similarities, there was something different.
The difference was how the bankruptcies were being reported to the credit bureaus, and this provided an interesting insight on how proper bankruptcy reporting methods is critical for those who have had the unfortunate incidence of filing.
When someone discharges all their debts, they can begin to re-establish credit one account at a time. Who issues credit to someone who is fresh out of bankruptcy? You'd be surprised, in fact, there are companies that specialize in giving credit lines to those with a bankruptcy in their background. Not huge credit lines mind you, but lines nonetheless.
After a couple of years and baby-step efforts to re-establish a credit score, eventually the credit score will rise. After three or four years, it becomes even better and perhaps hardly noticeable from a score standpoint. But unless a bankruptcy is properly reported to the three credit bureaus, Experian, TransUnion and Equifax, then the credit score repair will never happen.
It was hardly more evident than comparing this couple's separate credit scores. Joe (not his real name) had a bankruptcy discharged in 2000 and his middle credit score (throwing out the highest and lowest scores) was 709. Sally (not her really name either) however had a much lower score, with her mid-score coming in right at 597. This low score was keeping them from buying the home they wanted.
Even though her accounts were discharged those accounts were being picked up by credit bureaus as still being late. Her credit report showed late payments, as recently as last month, on credit accounts that had been discharged four years earlier! Negative items after a bankruptcy are killer. Her credit scores were being absolutely decimated.
The difference between Joe and Sally's credit report was that Joe's counsel made sure that all three credit bureaus received the discharge notification and received verification that the bankruptcy was properly noted. Sally's lawyer did not. Joe had re-established his credit scores while Sally was still in the red-zone.
The sad part is, Sally would never have known unless she had applied for a mortgage. She certainly hadn't seen her credit report lately and assumed everything was okay when it was anything but.
Similarly, I spoke with another lady about a week ago with a similar situation, her bankruptcy had been discharged almost four years ago but her credit scores were in the low 500's. Way too low unless she had flat-out messed up her credit again. But she had not, in fact she had a car loan paid on time and a credit card that was always on time. I told her to go pull her credit report and look to see if some of her accounts included in her bankruptcy were still being reported as late.
She did and they were. She is now in the process of getting that fixed.
But Sally did have a happy ending. I got copies of her bankruptcy discharge notice and faxed it into my credit reporting agency to have her credit scores re-calculated. The credit bureaus examined the discharge notice, made the corrections in her report then "re-scored" her with the corrected information. Her mid-score shot up to 689, way above the minimum for the loan they were qualifying for.
While it's always important for consumers to occasionally check their credit reports on an annual basis, it's even more so for someone who has recently experienced a bankruptcy. If the discharge is not reported properly, it could take years for the credit profile to be prepared.
