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It may not seem like it, but a certain amount of congratulations are in order if you’ve opted to declare bankruptcy. The decision to declare Chapter 7 or Chapter 13 bankruptcy is definitely not easy—and it’s definitely not pleasant—but once you’ve done so, you are starting to control your financial future. And that’s a good thing.
Bankruptcy isn’t a magic wand that fixes everything, though, and there’s no instant way to rebuild credit after bankruptcy. It’s a long process, and it takes a while to get back to a good credit score.
Stick to the following steps, and you’ll put yourself on solid financial footing for rebuilding your credit after bankruptcy.
Both Chapter 7 and Chapter 13 bankruptcy will stay on your credit report for a number of years. During the time they appear on your credit report, of course, your credit score will be negatively affected—but you should still absolutely be working to repair your credit score in every way possible.
While you can’t remove a bankruptcy from your credit report before the above timing has elapsed, you can file a dispute for removal of the bankruptcy if there are inaccuracies in the bankruptcy that appear on your credit report.
Yes, you can apply for new credit with a Chapter 7 bankruptcy, although the borrowing opportunities will obviously be much more limited given the bankruptcy listed on your credit report. But starting with small amounts of credit is a great step toward rebuilding after a bankruptcy.
With a Chapter 13 bankruptcy, you may not be able to apply for credit without court approval when you’re still in the repayment process. It’s extremely important that you check with your attorney before applying for credit, as taking on certain types of debt without court approval can lead to the dismissal of your bankruptcy and loss of the protections under it.
Here are some steps you can start to take toward rebuilding your credit after bankruptcy.
New credit will give you the opportunity to have a positive line of credit on your credit report. Here are a few lines of credit that could be best in your situation:
Secured credit card. This is the most likely kind of credit card you’ll be able to obtain following a bankruptcy. When choosing a secured credit card, make sure it’s one that reports to one or more of the three credit bureaus—Experian®, Equifax® and TransUnion®—or you won’t see any improvement to your credit score.
With a secured credit card, you put down a cash deposit in exchange for use of the card. For instance, for a credit card with a $500 borrowing limit, you’re typically required to put down $500 at the outset. If you failed to make monthly payments, the credit card issuer could take your $500 deposit to pay off the balance.
After a number of on-time monthly payments, some credit card issuers will begin to raise your borrowing limit, sometimes without requiring an additional deposit.
By having a new secured credit card and making on-time monthly payments, you’ll likely begin to improve your credit score. If the issuer raises your borrowing limit and you keep on top of your balance, your credit will benefit due to you having a lower credit utilization rate.
Credit builder loan. Credit builder loans are typically special installment loans designed to help you build credit. You deposit a certain amount into a savings account, which is locked, to secure the loan. Once you pay off the loan, you gain access to the account with your original funds. If you don’t pay off the loan, the lender can use the deposit accounts to recover its losses, but most lenders offering these types of loans do report timely payments to all three credit bureaus to help you build a history of timely payments.
Become an authorized user on another person’s credit card account. In this scenario, you’re added as a user on an account that someone else (perhaps a spouse or a relative) is responsible for paying every month.
You’re not liable for making payments on the account, but be aware that your credit score could be hurt if the primary account holder misses their monthly payments.
After a bankruptcy, the last thing you want to do is fall behind on paying loans and credit cards. Your credit will have already taken a significant hit from the bankruptcy, and failing to make payments will further damage a low credit score.
Staying on top of your credit score is important. Not only will it be satisfying to (hopefully!) see it go up, but you want to make sure you’re getting credit for your on-time payments and no errors are listed on your report. Make sure to check your credit score regularly.
Using a cosigner with good credit can allow you to access financing you wouldn’t otherwise be able to get. For instance, it might be difficult for you to secure a car loan following bankruptcy unless you have a cosigner.
You’re still responsible for paying the loan in this scenario. The cosigner simply helps you secure the loan (although if you fail to make payments, you’ll be leaving your cosigner on the hook to pay the loan off).
Payments for most loans, such as student loans, car loans, mortgages and credit cards, are reported to one or more of the credit bureaus by many lenders.
While you can’t directly report data to these bureaus, there are services you can sign up for that report additional payment information that hasn’t traditionally been reported to Experian, Equifax and TransUnion.
As long as you’re good about making your payments, this can count in your favor for credit reporting. They include:
Having high balances—especially ones you can’t pay off—is bad for your credit score. As much as is possible, try to keep your credit card balances low, and never neglect to pay your monthly credit card minimum payment (if not more). Remember that using all your available credit hurts your score.
It’s not uncommon for inaccuracies to appear on credit reports: one study found that roughly one-third of credit reports listed at least one error.
Don’t ignore any inaccuracies you see on your credit report—you should attempt to rectify them immediately. There are two ways you can remove mistakes from your credit report:
Consistency of income is important in making sure you’re able to make on-time payments for your debts.
“The danger of job hopping is the inconsistency in your income and the difficulty it causes in keeping payments up to date with creditors,” says Bruce McClary, spokesman for the National Foundation for Credit Counseling. “Lenders like to see consistency in employment. Borrowers need to show their level of income remains steady and that they have been able to make payments."
So while there’s nothing wrong with job hopping per se, you don’t want to do so if it leads to inconsistent income that’ll make it hard to make regular debt payments. Missing a monthly payment, of course, hurts your credit.
You never want to take your eye off the ball during the crucial credit-rebuilding years following a bankruptcy. Yes, seven to 10 years is a long time to have to pay attention to, well, anything, but it’s crucial to do so. Keep balances as low as you can, and don’t utilize too high a percentage of your credit lines. You can take some of the worry off of your own hands by signing up for credit monitoring.
Nobody likes to be told to eat their vegetables, but hey, vegetables do make you healthy. And sticking to a monthly budget allows you to get as financially healthy as can be.
Accurate budgeting will make sure that when it comes time to settle the bills that affect your credit report, you won’t be left unable to pay every month.
Even if you do everything possible to avoid getting into the type of situation that led to bankruptcy in the first place, plenty of unexpected stuff can happen in life.
That’s why it’s a good idea to have an emergency fund—something that can tide you over during financial setbacks. You can use this handy calculator to determine how much you should save every month for your emergency fund.
Ultimately, repairing your credit will give you peace of mind and let you breathe easier knowing you’ll be able to once again obtain credit where and when you need it.
Rebuilding credit after bankruptcy isn’t a quick process, but it doesn’t have to be daunting. If you follow the steps above, year by year you’ll see your credit score—and your life—improve.
Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.
