Recovering From Bankruptcy: 9 Tips to Help You Rebound

You’ve done a brave thing — you reached out for help and filed for bankruptcy. That’s not where your story ends. With the right mindset, you can come out of bankruptcy stronger and financially fit. Here are eight practical tips to follow when you’re recovering from bankruptcy.

1. Cut yourself some emotional slack

Even though it’s a judicial process and your legal right, filing for bankruptcy takes a psychological toll.

“Don’t feel like you failed, because bankruptcy is not an acknowledgement of failure,” says Phillip Shefferly, retired U.S. bankruptcy judge and adjunct professor at the University of Michigan. “There are a lot of people who have a sense that it’s somehow wrong if you have to file for bankruptcy, but it’s not. It really is an opportunity for a fresh start.”

So, embrace bankruptcy as an opportunity to get your finances in order, and learn as much as you can throughout the process. That way, when you’re able to borrow again, your mind and your credit score will be ready.

2. Find a budget that works for you

It’s easy enough to say you’ll create a budget, but when push comes to shove, how do you do it? There are tons of ways to budget, and not all of them will work for you.

• Do you deal mostly in cash (instead of a debit card)? Then the envelope method could be a good choice. Assign each of your monthly bills an envelope. Then put enough cash to cover each bill in its corresponding envelope.
• Do you have trouble saving? Try the pay-yourself-first budget. Have some of your paycheck automatically deducted and put into a separate account. You could opt for a high-yield savings account so that your money can grow.
• Do you hate tracking every penny? The 50/30/20 budget might help you keep your sanity. Spend 50% of your paycheck on mandatory monthly expenses, 30% on optional expenses (like vacations or dining out) and put 20% in savings.

For more information, read 5 Simple Budgeting Methods To Help You Live Your Best Life.

3. Start an emergency fund and live frugally

As mentioned, you might not be allowed to save much money, depending on the type of bankruptcy you filed. Chapter 7 discharges your debts and gives you a fresh start, so you can start saving as soon as you’re able.

According to a LendingTree study, more than one in three Americans are financially insecure in 2024. An emergency fund can help you avoid falling back into debt for an unexpected expense.

To have enough to cover your bills and then some, you may have to downsize your lifestyle and find new ways to save money.

For instance, it might be wise to stop eating out. Instead, use a meal planning app and cook based on what’s in season to cut down on your grocery bill. If you don’t know how to cook, fire up some YouTube tutorials and have fun learning a new skill.

4. Monitor your credit report

A bankruptcy can stay on your credit report for up to 10 years, but that’s not the only thing that can bring down your score. Credit reporting errors are common and can have a massive impact, too.

Check your credit report about 60 days after filing for bankruptcy, and continue to check it every month or two. You can order one free credit report a week by visiting AnnualCreditReport.com.

The main purpose here is to make sure that your discharged debts are updated correctly. Beside each discharged debt, look for a notation that reads “Included in bankruptcy” (or similar wording) and that the amount owed is $0.00. If it doesn’t, then you’re being dinged for a late payment that you’re no longer responsible for.

5. Avoid high-interest debt

You might be surprised how quickly you’ll start getting credit card and loan offers — sometimes just two or three months after filing. However, bankruptcy can wreak havoc on your credit score. A low credit score makes you a high risk to lenders, and high risk means higher interest rates.

Even if it feels like you have no other choice, avoid high-interest debt like the plague. Filing bankruptcy can make you more vulnerable to payday loans and other forms of predatory lending. Annual percentage rates (APRs) above 36% are generally considered predatory.

If you absolutely must borrow money, consider a family loan. Just keep up your end of the bargain to avoid a ruined relationship. Also, any debt is bad news if you can’t afford to pay it back — no matter where you get it from and what rate it carries.

6. Don’t job hop or move too often

After you declare bankruptcy, you’ll have to prove to future creditors that you’re now a reliable borrower. This can be hard if you don’t qualify for (or don’t want to take out) a new form of credit. One way to do this is by staying put with your employer and address.

Having gaps in your resume could be a red flag to a lender. How can you afford to pay back what you borrow if you lose your job? And living at the same address for years can show lenders that you consistently pay your rent or mortgage bill.

7. Save your bankruptcy paperwork

When you begin your life after bankruptcy, you might be tempted to toss out your paperwork. Out of sight, out of mind, right? No. Keep all of your paperwork. You may need it as proof if a creditor continues to garnish your wages for discharged debt.

8. Be strategic about rebuilding your credit

Rebuilding and improving your credit score doesn’t happen overnight. You don’t have to take out a bunch of new loans or cards to do it, either. In fact, taking on too much debt too soon might lead to a second bankruptcy. That’s why you need to be strategic.

 Pay your bills on time

Your payment history makes up 35% of your FICO score, and on-time payments generally go hand in hand with good credit.

Let’s say you kept your home after filing for Chapter 7. That means you’ll have to continue making your mortgage payments. Pay these on time to avoid further tanking your score (or risking foreclosure).

Utility bills and cell phone bills don’t typically appear on your credit report unless you default and they’re sent to collections. In other words, on-time payments probably won’t affect you, but late payments could.

Pro-tip

Rent payments usually don’t show up on your credit report. Consider signing up for Experian Boost. This app manually adds rent to your credit report, helping you take advantage of as many on-time payments as possible.

 Become an authorized signer on a credit card

One of the signs of a credit report scam is paying to be added to a stranger’s card as an authorized signer. However, there’s nothing wrong with becoming an authorized signer on a friend or family member’s card.

Being added as an authorized signer can help you get some on-time payments under your belt. That is, as long as the cardholder is responsible. Late payments affect you, so choose wisely.

 When you’re ready, get a secured credit card

Don’t rush into taking on more debt, but when you’re ready, there are credit cards designed to rebuild credit. Most of these are secured cards.

Secured credit cards require you to pay a deposit, which also serves as your credit line. Because you can’t spend more than your deposit, these tend to be lower risk for you and the credit card company.

After you’ve used your secured card responsibly, the credit card issuer could graduate you to a standard credit card.

9. Stay informed, but don’t get too obsessed with the numbers

Recovering from bankruptcy takes a long time. Don’t be discouraged if you don’t see your credit score go up right away.

Make it a habit to check your credit score (for free, using LendingTree Spring) once a month to make sure that you’re on the right track. Any more than that and you might lose motivation to stay the course if the needle doesn’t budge as fast as you hoped.

Progress isn’t always linear. But as long as you examine the reasons that led to your bankruptcy and work on remedying them, you should see positive movement. If you need extra help, meet with a credit counselor. Check out the U.S. Department of Justice’s list of approved credit counselors to get started.