Severely Damaged Credit
There are a few types of damage to your credit that deserve special mention. These are bankruptcy, foreclosure, and repossession, explained in more detail below. If any of these has happened to you, you need to take extra care to undo the damage to your credit. It won't be easy, and it will take time -- years in most cases. But with dedication and a full understanding of the importance of doing so, you'll clean up your credit before you know it.
Personal Bankruptcy
When an individual applies for bankruptcy and is awarded a discharge by the court, the individual is relieved of his or her obligation to pay back certain debts. There are two types of personal bankruptcy, both of which must be filed in federal bankruptcy court:
- Chapter 13 bankruptcy
- enables an individual to keep their property and establishes a repayment plan, typically over three to five years.
- Chapter 7 bankruptcy
- is also called straight bankruptcy. It requires that all assets that are not under the exception category be liquidated and the funds are then given to lenders.
Although both types of bankruptcy seem like an easy way to rid yourself of debt, the impact on your credit history is severe. Chapter 13 bankruptcy stays on your history for seven years and Chapter 7 stays on your history for 10 years. It should be considered a last resort.
Foreclosure
If you are not able to pay your mortgage debt, the mortgage lender is able to foreclose on the property. This means that the mortgage lender sells the property in order to repay the debt. In some cases, the lender will accept the deed to the property to avoid having to foreclose on the property. This is known as deed in lieu of foreclosure.
Although it's worse to have a foreclosure on your credit history, both foreclosure and deed-in-lieu are damaging to your credit and stay on your credit report for seven years. If your credit report shows a foreclosure or deed-in-lieu, it is likely that you will have trouble obtaining new credit for at least a few years.
You will need to establish good credit in the meantime. Start with maintaining an excellent payment history on your current credit cards. And consider a secured credit card if you have trouble getting a traditional credit card.
Also, be sure to write a statement for your credit file and send it to each of the three major credit reporting agencies. Your statement should describe, in a concise manner, the reasons behind the negative items, including any hardships. It will remain in your credit file as long as the negative item it explains.
Repossession
If you are unable to repay a loan on an item, often a car, the lender has the right to repossess the property.
A repossession remains on your credit report for seven years and is very likely to negatively impact your ability to get future credit.
