Despite bankruptcy filing, mortgage and new credit cards are still possible


Lenders call bankruptcy a "10-year mistake," because it can be listed on credit reports for up to 10 years.

But in reality, just months after declaring bankruptcy you might be able to get new credit cards -- or even a home mortgage. There's plenty of credit available, even though it will probably cost more following a bankruptcy.

In fact, one study of credit bureau reports in the Northeast showed that people who declared bankruptcy were able to obtain credit six months after filing for bankruptcy, according to the Credit Research Center at Purdue University.

Some lenders may even find former bankrupt clients desirable because "they can't [file for bankruptcy] for seven years," said Alan Grochal, a partner in the bankruptcy department of the Baltimore law firm Tydings & Rosenberg.

Layoffs have triggered financial troubles for many Maryland families during the recession. Meanwhile, the stigma of bankruptcy has eroded. As a result, personal bankruptcy filings in the U.S. Bankruptcy Court in Baltimore jumped to 6,513 from July 1, 1990 to June 30, 1991, compared with 3,585 filings in the previous 12-month period.

Mr. Grochal tells clients who try to re-establish credit that, "It will take some time and you will have to be patient."

Some people retain their credit cards despite a bankruptcy, walking out of court with a wallet full of credit cards at the original, favorable terms. If you have credit cards with no outstanding balances, you are not required to list them in a bankruptcy petition. Companies that issued the cards can check current credit reports and revoke them. But if they haven't had any trouble with your account, they probably won't do that.

If you're looking to re-establish credit, the first step is getting a secured credit card, one that requires you to have money on deposit with the issuing institution. After using the secured card for several months, you can usually get a traditional credit card, Mr. Grochal said.

Getting a mortgage may be trickier, because you have to find a bank or mortgage company that does not plan to sell the account. If they sell their mortgage accounts, they usually reject anyone with a record of bankruptcy, Mr. Grochal said.

When approaching a mortgage lender, be prepared to explain why you declared bankruptcy. You will fare better if you can prove that you can now handle your financial obligations, and that the bankruptcy was triggered by an unusual problem such as large medical bills, a divorce or a layoff.

"There is a big difference between showing that you are not able to pay and you just don't want to pay," said Virginia Stafford, manager of public relations for the American Bankers Association in Washington.

But even if you find a receptive mortgage lender, you will probably have to come up with a down payment of 20 percent to 25 percent. And you'll probably have to accept a higher mortgage rate.

Harder to overcome following a bankruptcy is finding a new job or apartment.

Employers in the defense industry, financial institutions and police departments often will not hire anyone with a record of financial instability.

Meanwhile, rental agents at large apartment complexes usually will not want to take a chance on you. You'll probably have better luck renting from someone who only has a couple of apartments and is less likely to do a credit check.

Where can you get help in re-establishing credit and handling your finances? Try the Consumer Credit Counseling Service of Maryland Inc.

The typical person seeking financial counseling is 33 years old, has three people in his family, nine unsecured creditors (usually credit card companies) and a car loan and a mortgage, says John Gengler, education director of the counseling service. The service's clients average about $25,000 in annual gross income -- and are carrying an equal amount of unsecured debt.

Recently, though, more and more people with incomes from $50,000 to $100,000 have sought the organization's help, Mr. Gengler says.

The credit counseling service, a non-profit organization, will help you work out a budget and payment schedule with creditors. For a location near you, call (800) 388-2227.

Many people don't need to file for bankruptcy at all.

A 1981 study by the Credit Research Center at Purdue University in West Lafayette, Ind., showed that of 1,200 consumers filing for Chapter 7, about one-fourth could have repaid 75 percent or more of their debts. And of that group that could have repaid some debt, about 60 percent more than doubled their net worth and 18 percent more than tripled their net worth.

The increasing social acceptance of bankruptcy and the impact of the Bankruptcy Reform Act of 1978 have contributed to the rising bankruptcy rate, according to the Purdue studies, one of which showed that people who had filed for bankruptcy were approved for one new credit account 65 percent as often as the overall pool surveyed. The pool of people studied included both people with good credit and those who had gone bankrupt.

The 1978 reforms allowed people filing for bankruptcy under Chapter 7 of the U.S. Bankruptcy Code to keep more assets, eliminate most of their liabilities and improve their net worth.

A Purdue researcher even documented a wave of bankruptcy filings in a community, as one neighbor told the next about the benefits of going bankrupt.

With the increase in bankruptcy filings, creditors are increasing their efforts to weed out fraud in the system. One of the leaders in the campaign is Visa U.S.A., based in San Francisco.

The credit company is also distributing a free booklet called "Managing Your Credit Wisely." For a free copy, write to Visa, P.O. Box 8999, San Francisco, Calif. 94128.

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