Understanding Bankruptcy
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Life After Bankruptcy: 7 Tips for Recovering

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Life after bankruptcy can offer a fresh start, but you also have a lot of repair work to do with your credit, which has most likely taken a huge hit during the process. The good news here is that there are many ways to bounce back after bankruptcy.

Recovering after bankruptcy isn’t always easy, but here are some tips to make your second chance go a bit more smoothly.

1. Monitor your credit report

After you’ve emerged from bankruptcy, it’s important that you keep an eye on your credit report. The activity on your credit report determines your credit score, so it’s important to monitor it.

You can pull your free credit report from AnnualCreditReport.com and compare activity from all three of the main credit bureaus — Equifax, Experian and TransUnion.

Checking your credit report can also help ensure that all the eligible debt included in the bankruptcy is noted as such on the report — rather than hanging out there as an unpaid debt, which could continue to hurt your credit.

Unfortunately, incorrect, negative information showing up on credit reports isn’t uncommon. According to the Federal Trade Commission, around 1 in 5 people have at least one error showing up on their credit report.

If you find any errors or debt that was discharged but has not been recorded as such on your credit report, dispute the information with your creditor. Getting errors off your report can quickly improve your credit.

2. Avoid high-interest products and scams

After you declare bankruptcy, you may find subprime lenders like title loan companies, pawn shops or payday lenders peddling high-interest products to you.

Steer clear of them.

Instead, focus on making sure you’re in a position where you can afford all your bills. If you need to borrow money, look instead to other sources like borrowing from loved ones or credit unions that offer second chance programs.

Credit-repair scams

You should also be sure to avoid credit-repair scams.

When credit-repair companies claim they can create a new credit identity or remove your negative credit history for you, stay vigilant — the offer may sound tempting, but it may be a scam.

The Federal Trade Commission has a list of warning signs of credit-repair scams. Specifically, beware if the company does any of the following:

Requires that you pay up front for credit repair before any service is performed.

Doesn’t tell you your legal rights.

Asks you not to contact credit reporting agencies.

Advises you to dispute information that’s accurate but negative on your credit report.

Tells you to lie on your application for a loan or credit.

Claims it can create a new identity for you (for a fee).

Keep in mind that some of the practices mentioned above are illegal, and if you follow through on them, you could face criminal charges resulting in prison or steep fines.

3. Save your bankruptcy paperwork

Once your bankruptcy case is completed, it may be tempting to toss all the paperwork into the trash can to try to forget about it.

However, you may need to provide those documents if, for instance, a collection agency contacts you regarding a debt that was discharged in your bankruptcy case. In those instances, you can provide your bankruptcy paperwork as proof that the debt was discharged.

You may also need to provide these documents when you apply for credit accounts, like a mortgage loan. (Below, see the frequently asked questions about getting a mortgage or other big loans after bankruptcy.)

4. Keep steady with your home and job

After bankruptcy, keeping a stable job and consistent residence is a way to demonstrate to creditors that you are reliable.

Many lenders consider your income and employment history when it comes to providing credit accounts because they want to know if you make enough to repay the loan. Having gaps on your resume may leave an impression with lenders that you could be a risky borrower.

Likewise, consistently living at the same residence might also demonstrate that you could be a reliable borrower. In the eyes of some lenders, it can indicate that you pay your mortgage or rent bill consistently on time and therefore might repay your loans in the same manner.

5. Rebuild your credit

Once your debts are discharged from your bankruptcy case, it may be easier for you to start rebuilding your credit. Paying your bills on time, keeping your credit utilization ratio low and mixing up the types of credit accounts you have can all help.

Know that it’s very possible you will soon see your credit score recovering after bankruptcy. A LendingTree study from 2020 found that among people who had filed for bankruptcy and then sought loan offers on LendingTree the following year, 56% already had credit scores of 640 or higher.

There are different ways to improve the various factors that go into your credit score.

Make payments on time

Your payment history makes up 35% of your FICO Score. Given how important having a history of consistent on-time payments is, you shouldn’t wait to pay your bills.

Let’s say you had a mortgage that was not included in the bankruptcy. Continuing to pay the mortgage on time is very important in rebuilding your financial life after bankruptcy.

You should also be on top of your other bills that are not in the credit report, such as utilities, cellphone bills and medical bills. If they fall too far past due and become delinquent, they could go into collections. The collection account may then end up on your credit report and put a dent in your credit.

If you have a hard time tracking what you owe, consider setting up automatic payments through your bank or possibly using budgeting apps to stay on top of your expenses.

Keep your balances low

Don’t max out your credit cards. The amount you use of your available credit — known as your “credit utilization ratio” — is part of what determines your credit score (30%). It’s not a good idea to use a lot of your credit limit, even if you pay your monthly credit card bill in full and on time.

As a general rule of thumb, credit experts encourage consumers to keep their balances under 30% of their overall available credit. For example, if you have a credit limit of $500, you should try not to use more than $150 before paying it off.

This is because lenders may consider people with high balances on their credit cards and other revolving debt as risky borrowers. The negative impact on your score magnifies as your credit utilization ratio increases.

Apply for a credit card

A new credit card after bankruptcy can help you rebuild your credit. But you will likely want to keep your balance low, and you should make sure to pay it off in full and on time each month to avoid being charged interest.

Another option — if you don’t qualify for a traditional credit card — is a secured credit card.

Opening a secured credit card is a proactive measure to rebuild your credit. With a secured card, you’ll use your own money as collateral by paying a refundable deposit to your lender. The amount of your deposit will be your credit limit. The card will then operate like a traditional credit card.

Some credit card companies even allow you to transition from a secured credit card to an unsecured credit card after a certain number of on-time payments or other qualifying factors.

Increase your credit mix gradually

It’s a good idea to open new accounts in stages as you slowly rebuild your credit.

Of the different factors that make up your credit score, new credit inquiries and credit mix each comprise 10%.

For example, let’s say you got a new credit card and use it strategically. As you see your score increasing after showing some payment history, you might consider getting an installment loan next — such as a personal loan, car loan or mortgage — which adds to your credit mix.

However, it may be wise to wait several months or longer to do this, rather than applying immediately after a bankruptcy. Just remember that requesting new credit too frequently can hurt your score, so only apply when you need it.

6. Start saving and follow a budget

Setting aside savings every month can help you build toward your financial goals and grow your financial confidence.

Aside from saving, it’s also worthwhile to create and stick to a budget.

In some cases, people resort to bankruptcy because they don’t have a budget they follow and they overspend. An effective budget will help you make on-time monthly payments and control your spending.

Avoid impulse buying, and instead of taking out a loan to buy something, consider using any leftover funds from your paycheck to save up for the purchase instead.

Start an emergency fund

Try to also make room in your budget to save up for unexpected financial emergencies, such as a job loss. An emergency fund typically covers three to six months’ worth of your necessary living expenses.

This may take a year or longer to save. But if you truly want to avoid repeating history, putting money aside for an emergency fund can make a big difference in your financial future. With it, you can bail yourself out when the next emergency arises, instead of borrowing.

7. Be determined and prepared for challenges

Unfortunately, filing for bankruptcy isn’t a magic wand you can wave to make all your financial troubles go away. You still need to learn how to better manage your finances in order to avoid making the same errors again.

Recovering from bankruptcy may require willpower, hard work and patience. You may have to change your lifestyle or significantly trim your expenses, which isn’t always easy.

There is no quick fix for damaged credit, but soon enough you may be on the path to financial recovery and attaining goals, such as buying a house, getting a new vehicle or taking that vacation you always wanted.

If you find it overwhelming and do need help, look for reputable credit counseling organizations that offer help with a low fee or no fee. You can consult the U.S. Department of Justice’s list of approved credit counselors to find one.

Frequently asked questions

While having bankruptcy in your credit history may present some challenges when attempting to rent a home, it’s still very possible to achieve.

Because most property owners require that you submit to a credit check before they’ll rent to you, it may be pretty difficult to hide your bankruptcy filing. However, if you can demonstrate a history of on-time payments, provide references and offer more money up front (such as a larger security deposit), you may have an easier time qualifying.

Consider applying for a home rented by a private property owner (rather than a large rental management company) to improve your chances.

When it comes to mortgage loans, you may have to wait for a certain period of time before you’re eligible, depending on the type of loan and bankruptcy:

  • With a Chapter 7 bankruptcy, you’ll need to wait four years after your debt has been discharged before you can apply for a conventional mortgage loan.
  • For a Chapter 13 bankruptcy, the waiting period is just two years.

Just as you can still rent and take out a mortgage loan after bankruptcy, you can also qualify for an auto loan. However, before you can apply, you may have to work on increasing your credit score and save up for a down payment (at least 10%).

You also may end up having to pay a higher interest rate than someone without bankruptcy in their credit history.

When going through the job application process, some employers may run a background check on you. When they do, they can only view a modified version of your file. But while your potential employer might not be able to see your credit score, they will be able to view public records, such as bankruptcy.

On a federal level, it is not illegal for employers to pass you over for a job opportunity because of your credit. However, in some cities and states, there are laws in place to prevent employers from discriminating against you. Be sure to check your state and local legislation to find out whether you are protected when applying for jobs.

 

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