8 Ways to Rebuild Your Credit After Bankruptcy
Bankruptcy rates are increasing in the U.S., especially in Southeastern states and among the elderly. That means more Americans this year are in dire financial straits and in need of a last-resort solution.
Bankruptcy drags down consumers’ credit scores, which are essential for future borrowing. Such damage requires time and effort to repair. The good news is that there is plenty you can do to bring up your credit once it has been impaired by bankruptcy.
What happens to your credit after bankruptcy
A bankruptcy will be recorded in your credit report’s public records section and will stay on your report for seven to 10 years, depending on the type of bankruptcy you file. Once bankruptcy is completed, the record should show that both the bankruptcy and the included accounts are discharged.
One of the most damaging things about bankruptcy is its impact on your credit score. Once your bankruptcy is filed and reported, your score will take a dive, though there is no set formula for how much it will drop. The higher your score was when the process started, however, the greater a drop you can anticipate.
How long your bankruptcy will stay on your credit report depends on whether you’ve filed a Chapter 7 or Chapter 13 bankruptcy. Chapter 7, also called a liquidation bankruptcy, involves selling off your assets to pay off creditors. Chapter 13, also known as a reorganization, focuses on restructuring debt to manageable levels instead of discharging it via asset forfeiture. A Chapter 7 bankruptcy will stay on your report for 10 years. A Chapter 13 will be deleted after seven years, though it takes longer to complete the Chapter 13 process.
While bankruptcy can feel like a devastating blow with a very high cost, it’s important to remember that credit repair is possible. While the bankruptcy remains on your credit report for many years, its impact on your credit can be reduced starting after only two or three years. As you take patient and deliberate action to repair your credit, your score will gradually rise.
“Don’t worry so much about credit at first,” said attorney Shawn Yesner of Yesner Law, who frequently guides clients through bankruptcy. “Bankruptcy is to eliminate liability, so that is the primary goal — avoiding garnishment, repossession, lawsuits, etc.” No one was born with a perfect credit score, he noted, and we can all rebuild it given time and patience.
8 ways to rebuild your credit after bankruptcy
Rebuilding your credit post-bankruptcy is a process that’s best approached systematically. There’s no single formula to predict how fast your score will rise; it depends on the specifics of your credit.
“Your first step in planning on how to rebuild your credit after bankruptcy is to assess your financial situation and examine your credit,” said Leslie H. Tayne of Tayne Law Group, debt resolution attorney and author of “Life & Debt.” “You’ll be able to gauge what work needs to be done to get back on track.”
Here are some ideas to consider:
Make a budget. Improving your credit depends on paying all your debts in a timely manner. The first step should be making a budget to ensure you have enough cash on hand to do that.
Pay bills on time. Be extra vigilant about due dates in order to build your credit back up. Paying on time is the most important thing you can do to help your score.
Keep paying student loans. Student loans are not discharged in bankruptcy, so it’s essential you keep paying them in full and on time.
Apply for a secured credit card. It may be impossible for someone coming out of bankruptcy to obtain a standard credit card, but a secured credit card is usually an option. Using such a card responsibly will have a positive effect on your credit. “Use the card to buy gas or groceries, then pay it off or replenish the secured portion at the end of every month,” said Yesner. “Do this for a period of time and credit will rebuild.”
Find a cosigner with excellent credit. If you have a friend or family member with credit good enough to cosign a new loan with you, see if they’ll help you rebuild. You can obtain a new loan on the strength of their credit and then work with them to pay it back on time.
Become an authorized user on another account. If someone you know has excellent credit and a credit card, see if they are willing to add you as an authorized user on the account. That vote of confidence will do good by your credit score.
Consider a credit builder loan. Various types of loans are designed to help those with low credit scores or little credit history build up their credit. These are often secured loans with lower interest rates than unsecured loans, and they can be a good option for establishing a newly responsible credit history.
Take out a store card. Many of your favorite stores may offer credit cards to shoppers with a low credit score. The reason you may consider opening one of these is to increase your credit limit, which reduces your utilization rate, improving your credit score. However, the plan works only if you don’t overuse the card.
The bottom line
It will take time to rebuild your credit after bankruptcy, but it is certainly possible using very deliberate steps. It’s essential to be honest with yourself about your problematic history and to be patient with the process of rebuilding.
“One of the first steps to improving your financial well-being is taking into account why you might not be as financially healthy as you’d like,” said Tayne. “This is an uncomfortable process, as it often means admitting your shortcomings in certain areas, but it’s important to pinpoint where you can make changes.”
As the changes accumulate over time, you’ll be able to put your negative bankruptcy experience behind you and move on to a brighter financial future.