Understanding Bankruptcy

13 Tips for Recovering After Bankruptcy

Life after bankruptcy isn’t easy. You have 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 ways to bounce back after bankruptcy.

Bankruptcy doesn’t wipe clean your credit history — it clarifies that you don’t have an obligation to your debt anymore, and the bankruptcy record will stay on your credit report for seven to 10 years. Credit counselors interviewed by LendingTree suggested you not wait to rebuild your credit after the record falls off from your report.

Thomas Nitzsche, a credit educator at Money Management International, a nonprofit credit counseling company, told LendingTree that it takes about two to three years to restore someone’s credit post-bankruptcy if they follow the right steps and form responsible financial habits.

According to LendingTree research, within a year of the bankruptcy, 43% of people with a bankruptcy on their credit file have a credit score of 640 or higher. Within two years, 65% have a credit score above 640.

“The more disciplined you are, the faster you’ll be able to recover from the bankruptcy,” Nitzsche said.

#1 Make sure your credit file is correct

The first step to take coming out of bankruptcy is to pull your free credit report. This is to make sure all the debt that was included in the bankruptcy is noted as such on the report, not hanging out there as an unpaid debt, which could continue to hurt your credit. Credit counselors said it’s possible that incorrect, negative information exists on your file by error.

“Your attorney is going to do their job to file a bankruptcy for you and make sure you don’t have a legal obligation; your attorney is not going to go through and do a credit update,” said Edward Sanchez, president of Chicago-based MoneySharp Credit Counseling. “The client has to be able to protect themselves and make sure that the credit report reflects what is true.”

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

#2 Monitor your credit report

You should check your credit report monthly; it shouldn’t be a one-off post-bankruptcy action.

Besides avoiding negative information following you, you should also monitor your report to make sure that your responsible behaviors, such as paying bills on time, are reported to the credit bureaus. Sanchez has a great analogy:

“Imagine if you wrote a great paper, you turned it into your professor and you never went online to see if your professor put it in the online grade book,” he said. “Why would you go through all that work and present it and then not verify that it is being reported accurately? What if your professor put it up as a C or never did report it?”

So it’s not just important to do the right things, but make sure that they are reflected on your credit report. Just know that getting your credit reports can cost you. While everyone is entitled to a free annual credit report from each of the three major credit reporting agencies, you’ll likely have to pay a fee to get it more frequently.

#3 Make payments on time

Your payment history makes up for 35% of your credit score. A history of consistent on-time payments is the most significant factor in your credit score calculation. Don’t wait to pay your bills.

Let’s say you had a mortgage and it was not included in the bankruptcy — you’re staying in the home, and you need to continue paying the mortgage on time.

Nitzsche said that you should also be on top of your other bills that are not in the credit report, such as utilities, cell phone bills and medical bills because if they fall too far past due, they will go into collections. The collection account may then end up on your credit report and make a dent in your credit.

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

#4 Avoid high-interest products

After you declare bankruptcy, it’s prime time for subprime lenders, title loan companies, pawn shops or payday lenders to peddle high-interest products to you — the sharks all come out.

Steer clear of them.

“You really want to make sure you’re in a position where you can afford all your bills,” Nitzsche said. “If you do need to borrow, you really want to first look towards other sources like family or retirement fund loan, or some credit unions [that] have things like a second-chance program for low balance loans.”

#5 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 offers sound tempting, but they may be scams.

The Federal Trade Commission has listed the following warning signs of credit repair scams, if the company:

  1. Wants you to pay upfront for credit repair services before doing any work.
  2. Doesn’t tell you your legal rights.
  3. Asks you not to contact credit reporting agencies.
  4. Advises you to dispute information that’s accurate but negative on your credit report.
  5. Tells you to lie on your application for a loan or credit.
  6. Claims they can create a new identity for you for a fee.

If you fall for these scams, you could end up in prison or with steep fines. Lying on credit applications is a big deal.

There is no quick fix to damaged credit, but you can totally do the repair work yourself by following the tips in this post. If you find it overwhelming and do need help, look for reputable credit repair firms or credit counseling organizations that may charge fees but are clear about what they can and cannot do for you. To pick a reliable credit counseling firm, visit the Financial Counseling Association of America or the National Foundation for Credit Counseling. You can also find a list of approved credit counselors by the U.S. Department of Justice.

#6 Get 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, which is often about $200 or more. The amount of your deposit will be your credit limit. The card will then operate like a regular credit card. Use it as a tool prove your responsibility and reliability as a borrower: You should make small purchases each month and then pay them off on time and in full.

Some credit card companies allow you to “move up” from a secured credit card to an unsecured credit card after a certain amount of on-time payments or other qualifying factors.

#7 Get a regular credit card

However, after you declare bankruptcy, it may be a stretch for you to even put down $300 on a secured card. Sanchez said it’s possible for you to apply for a regular credit card with poor credit. Carefully read the card terms so you’re aware of any fees you may have to pay.

The new credit card should serve the exclusive purpose of building credit. This means you need to keep your balance low and pay it off in full and on time each month. Again, the rule here is not paying credit card interest.

“They’re not used for emergencies; they are not used for points, and they are not used for rewards,” Sanchez said.

#8 Keep balances low

Don’t max out your credit cards, because the amount you use of your available credit (credit utilization ratio) is part of what determines your credit score. 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 rule of thumb, credit experts encourage consumers to keep their balances under 30% of their overall available credit limit. This means if you have a credit limit of $100, you should not use more than $30 before paying it off.

This is because lenders see those with high balances on credit cards and other revolving credit accounts as risky borrowers. The negative impact on your score magnifies as your credit utilization ratio increases.

#9 Pay your balances close to the due date

It’s absolutely imperative that you make payments on time, but you may not want to pay off your credit card debt too far ahead, Nitzsche said. Instead, pay it a few days before the due date.

Nitzsche said this is because you don’t know when in a month the creditor reports to the credit bureaus. And if you pay it too fast, your creditor may not generate a statement balance. Because creditors report a statement balance to the credit bureaus, paying your bill before a statement has been generated may mean the bureaus don’t get a record that you owed money.

“When you receive the bill, note the due date, and then pay it just a couple of days before the due date,” Nitzsche said. “So it has time to post and it shows that for a good portion of the month you did owe money, that way you can build your credit.”

A great way to make sure you do this is to set up automatic payments to go through a few days before or on the due date.

#10 Increase your credit mix in stages

You should only open new accounts in stages as you slowly rebuild your credit.

There are different factors that make up your credit score. New credit inquiries and credit mix each make up 10%.

So you got your credit card and use it strategically with discipline. That’s great. As you see your score increasing after showing some good credit utilization and good pay history, next up is an installment loan — personal loan, car loan or mortgage as you need them — which adds to your credit mix. But you should do this over several months or years, not immediately after a bankruptcy, Sanchez said.

Sanchez suggested waiting about a year after opening and responsibly using your credit card, then applying for a credit builder loan. Similar to secured credit cards, those credit builder loans allow you to deposit a small amount of money into a secured savings account, and then you make monthly payments — with interest — over a set period of time, which typically ranges from six to 24 months At the end of the loan’s term, you will receive the total amount of the loan in a lump sum.

“I recommend getting a loan because what will create the greatest buildup of a score is also having a mix of credit,” Sanchez said. “While the person is building credit by properly using a credit card, they will need to show the bureaus that they have the ability to manage different types of debt.”

While that’s true, keep in mind that credit mix is only 10% of your credit score, and it may not make sense to take out a loan and pay interest when the loan’s sole purpose is to build credit. Rather than take out a credit builder loan just to add to your credit mix, you can continue using your credit card responsibly and take out an installment loan when you need it later, like when you’re buying a car or making a large purchase.

If you do take out a credit builder loan, make sure that the creditor reports to at least one of the three credit bureaus, and preferably all three, Nitzsche said. Ask about credit reporting before you take out a credit builder loan.

Just remember that requesting new credit too frequently will hurt your score, so only apply when you need it. New credit inquiries typically remain on your credit report for two years, according to FICO. The company also reported that the average age of a high-score holder’s newest credit is two years and five months, and only less than 35% of the consumers with high credit scores applied for new credit once or more in the past year.

As you continue doing the right things to restore your credit, you can gradually apply for bigger, more robust loans if you need them. LendingTree research shows that after five years of a bankruptcy, about 75% of the filers restore their credit scores to levels where they can qualify for loans.

#11 Follow a budget

In many cases, people resorted to bankruptcy because they weren’t budgeting, Nitzsche said. Now you need to learn to spend less than what you make. Create a budget and stick to it. An effective budget will help you make on-time monthly payments and control your spending.

“You can’t just be an impulse buyer on things,” Sanchez said. “If you know that you need $2,800 to cover your expenses on a monthly basis, and you know that you bring home $3,100 a month … you only have a $300 buffer.”

#12 Start saving for an emergency fund

Make sure you also make room in your budget to save money for unexpected financial emergencies, such as a job loss. An emergency fund typically covers three to six months’ of your necessary living expenses, which may take a year or even longer to save. But if you truly want to avoid repeating history, you really need to start saving. That way, you can bail yourself out when next emergency arises, instead of borrowing.

#13 Be determined and prepared for difficulties

Unfortunately, Sanchez said some people never recover from bankruptcy because their entire lives had been supplemented by debt. To be financially rehabilitated, you need to learn lessons and be determined to turn over a new leaf.

To be sure, a full recovery from bankruptcy demands much willpower, hard work, patience, and discipline. You may have to change your lifestyle or significantly trim your expenses, which could be painful. However, if your goal is to never repeat that catastrophic financial setback and to one day achieve financial freedom, your efforts will pay off one day.