Once you’ve filed for bankruptcy and received a discharge of your debt, you need to attempt to rebuild your credit. If you own your home, you might wonder if it’s possible to obtain a home equity line of credit (HELOC). You might also wonder if doing so would help you to improve your credit post bankruptcy.
While rebuilding credit after bankruptcy is possible and owning a home with equity means you have the ability to obtain a HELOC, this southern California bankruptcy attorney wouldn’t recommend it. The benefits simply don’t outweigh the potential risk to your home.
Using your home (or other asset) to improve your credit might seem like a great idea, but it’s an unnecessary risk. There are other ways to improve your credit. Using your home to rebuild your credit through a HELOC post bankruptcy means you’re doing so with no negotiating power because your post bankruptcy credit is poor. The lender offering you a HELOC in this situation would charge points, fees and high interest rates (potentially as high as 18% or more). The fees could even be up to 10% of your loan amount. You might borrow $10,000 and have $1,000 in fees before you’ve even made any principal or interest payments. You also need to consider the fact that you might need to use your home’s equity in the future. You might someday want to take advantage of the opportunity for a reverse mortgage, which is a loan available to seniors who own their home outright.
Other Options for Restoring Credit Post Bankruptcy: Secured Credit Cards
Secured credit cards are the best way to reestablish your credit post bankruptcy. Instead of using your home to obtain credit to improve your credit score, you can use some available cash. If you’re unsuccessful in obtaining an unsecured credit card, you are eligible for a secured card. The secured card option means that you provide the bank/credit union with a deposit and in exchange they provide you with a card with the “credit line” equaling the deposit they received from you. This way you can use cash as security for your loan and leave your home equity untouched.
When Obtaining A Secured Credit Card
- Watch out for outrageous up front fees/charges.
- Make sure that the credit line and your payment history on the credit line will be reported to major credit bureaus: Experian, Equifax, and Transunion.
- Try to work with a lender who will eventually offer you an unsecured credit card after you show a good history of on time payments on your secured card. 12-24 months of good payment history will be enough for some companies.
- As you establish credit, you should be able to demand better terms/rates.
If you need more information on how to reestablish your credit post bankruptcy, contact the southern California bankruptcy experts at Westgate Law.