How to Rebuild Your Credit after Bankruptcy

Smart Ways to Re-establish Your Credit

If you have recently filed for a Chapter 7 or Chapter 13 bankruptcy, there is no doubt that you have been through some very stressful and traumatic times over the past few months or so. You may have been dealing with these financial problems for a year or more. You may have even lost your home. So your outlook at the moment is probably somewhat clouded by all that you have had to deal with.

If most or all of your debt has been discharged (Chapter 7) or been reorganized (Chapter 13), you are now in a position to start fresh with your finances. It’s true that your credit rating has taken a severe hit with the bankruptcy. (It would have been negatively affected before this anyway due to continuously late or missed payments.) It’s also true that bankruptcy will remain on your credit report for up to ten years. This is one of the serious aftermaths of filing for bankruptcy and the main reason it should only be considered after all other options have been ruled out.

The good news is that in the world of finance and credit, nothing is forever. It may take you some time to re-establish your credit, but it can be done. The important thing to take from the experience of bankruptcy is a determination to live within your means and to learn to make smart decisions when it comes to money matters.

If you filed a Chapter 13, your debts were reorganized and you now pay a trustee of the court an agreed upon amount every month. The court then pays your creditors. This means that you have a limited income every month from which to pay your normal living expenses, such as mortgage or rent, groceries, and utilities. Normally, you are not allowed to take on any new debt without first getting permission from the court. After your reorganization commitments are over, you are free to use your money however you choose. (Hopefully &wisely)

The circumstances are a bit different with a Chapter 7. If most or all of your debts were cancelled, your credit report is basically washed clean. But it will state that the accounts and the amounts owed were cancelled through bankruptcy. This will remain on your report for up to ten years. Your income is yours to budget as you wish.

You will probably find that soon after your bankruptcy has been finalized, you will begin receiving advertisements through the mail offering you credit for a car loan, or credit card, or even a personal loan. Many of these are legitimate offers but you need to seriously consider the impact of taking on new debt so soon after a bankruptcy.

If your car was repossessed with the bankruptcy, you obviously may need some type of new or used vehicle. Almost every car dealership has some type of financing they can offer to someone in your position, but it will come with a very high interest rate and longer terms (more money to the lender). This is the price you have to pay (literally) for getting credit after a bankruptcy.

There are some things you can do after a bankruptcy which will help you start rebuilding your credit and also establish sound spending habits. Here are some good suggestions to get you started.

  1. Try to live more simply. Having fewer “things” doesn’t always mean actually having less. Avoid the money traps which may have gotten you into financial trouble before- impulse shopping, having no budget, and not watching your bank account. It’s important to learn from your mistakes, not repeat them.
  2. Pay your bills on time, every month, always. This is probably the single most important thing you can do to rebuild your credit. When your credit report indicates a year or two of consistent timely payments, the bankruptcy will become less and less important to potential lenders. Make this a priority.
  3. Try to build up some savings. This may be hard at first, especially if you have never saved before. Start small and see how your savings account grows. Gradually try to increase the amount you deposit. If you are following a budget (which you should be) try to include this amount in your overall plan. This can make it easier and also forces you to get in the habit of saving.
  4. Apply for a secured credit card. More than likely, you won’t be approved for an unsecured credit card. With a secured card, you give the issuing bank a deposit which covers the amount of your spending limit (normally $300-$500). They hold this amount and if you ever default on your account, they take your money to cover the loss. You should only charge a small amount each month and then pay it off in full. This will be reported to the credit bureaus. Again, paying in full and paying on time are the key points. Your credit rating will begin to improve.

There’s no way around it- bankruptcy is difficult. But it’s not the end of the world. Time heals. It may take a year or two, but slowly, by establishing sound spending habits, learning to budget your money, and living a no-frills lifestyle, your credit rating will begin to improve and the bankruptcy will matter less and less. That means lower fees, lower interest rates, and better deals on all types of loans.