How to Rebuild Credit After Bankruptcy
Many people avoid bankruptcy because they have heard the stories of how bankruptcy stays on your credit report for 7-10 years. They believe that this will ruin any chances of ever having a good credit score. Untrue. In fact when you file bankruptcy and receive your immediate debt relief you begin to rebuild your credit. There are more factors involved in your FICO or credit score than just bankruptcy or repossession . The amount of debt you have plays a huge role in the scoring. When you file bankruptcy you have discharged that debt and are able to start the very next day towards rebuilding your credit.
With responsible credit practices you will have rebuilt your credit profile within a year or two. Paying your mortgage on time, paying your auto loans on time, and even getting a secured credit card wherein the payments are made, again, on time all work to improve your credit score. So don’t avoid debt relief measures like bankruptcy just because you are worried about what it will do to your credit score. Your credit score is already low because of your debt to income ratio and missed payments. When you file bankruptcy the debt is discharged and you have a fresh history of payments ahead of you that you can make on time, proving yourself to be a worthwhile risk for future credit.
Bankruptcy isn’t the stigma it used to be-especially in this economy. It also was a right provided to us by our Founding Fathers. People sometime forget that most of our first presidents ended their lives heavily in debt. Good people fall on hard times. Even the best of us.
Ah. Do you feel that weight lifted off your shoulders? You have successfully filed bankruptcy, and in doing so, you have made your first step toward repairing you credit. It feels liberating to not have creditors calling you on a nightly basis with sometimes-hostile demands that you make payments you can’t possibly afford. Instead of demand letters, you are receiving credit applications. What a difference!
Beware, though. Life after bankruptcy is filled with many temptations to rush to high credit lines and to work with so-called credit-repair companies. After bankruptcy, you are better off continuing to live meagerly and rebuild your credit yourself, slowly.
You are likely receiving credit card offers like you did when you turned 18. Your best option is to select a credit card with the lowest fees and interest you can acquire and use it specifically for occasions where you must use a credit card, like renting a car or using a hotel room. Do not use the card to purchase necessities and for frivolous spending. You will begin living out of your means again and perpetuate the habits that led to bankruptcy. Also, be sure to pay more than the minimum due each month, or you may find yourself in bad shape again really fast.
Another challenge freshly bankrupt individuals face is determining how to rebuild credit. Be cautious about working with credit repair companies. Everything they claim to do for you, you can do on your own (and would likely benefit from doing the legwork). Frequently the companies try to loan you money or claim to be able to remove legitimate items from your credit report. Worse still, some companies will suggest you fudge your social security number on credit applications. Not only are they not doing you any favors, they may put you in a worse position if you follow their “advice” to secure credit fraudulently.
The best thing you can do for yourself once you have started rebuilding your credit is to obtain your credit reports from Experian, TransUnion and Equifax, and check that your debts listed on the bankruptcy have zero balances. Anything that does not appear to be in order should be brought to your attorney’s attention immediately so they can see that creditors and the reporting agencies act in compliance with the court’s order.
Furthermore, you will want to review your credit reports frequently to make sure that your new, good behavior is duly noted. Check for mistakes on the reports and dispute them through the appropriate channels. Take advantage of this opportunity to start over by developing the good habit of reviewing your credit and limiting your spending.
To rebuild credit after bankruptcy, you need to have a plan. That plan has to be better than the one that landed you into bankruptcy in the first place. Sure, it’s a huge relief to have all that debt off your shoulders, but the bankruptcy will be on your record for the next 10 years for those who filed for Chapter 7.
On the other hand, the older the bankruptcy is, the lower the impact it will have on credit offers. In other words, potential creditors will consider the most recent activity the most important information. To rebuild credit after bankruptcy, you must regain the trust of creditors.
If your debt has spiraled out of control, a fresh start may be exactly what you need. Call the bankruptcy attorneys at Allmand Law Firm, PLLC at (214) 740-3682 and we can start discussing your situation.
How Does Bankruptcy Affect my Credit Score?
The purpose of your credit score is to show lenders how much risk they would undertake if they were to loan you money. High credit scores indicate that your debts are paid regularly and on time. Lower scores are a sign
that debts are not paid on a regular basis. Naturally, then, it makes sense that bankruptcy would cause your credit score to drop, but this is only temporary. Consider the following tips to begin rebuilding your score.
You Can Begin Restoring Your Credit Right Away
Start rebuilding your credit right after your bankruptcy is discharged. Many debtors feel that they never want a credit card or any type of debt after they file bankruptcy. While that sentiment is understandable, it is counterproductive to rebuilding credit because in order for a bankruptcy debtor to improve their credit score they must apply for credit. The longer you delay this process the longer it will take to rebuild your credit score and history.
Contrary to popular belief, your credit isn’t “ruined” because you filed for bankruptcy. On the other hand, it isn’t in a very good place either. It has to be rebuilt from scratch.
Before we get into that, however, let’s take a look at why you might be an attractive prospect to potential lenders.
Firstly, if you’ve filed for Chapter 7, it will be another 8 years before you’re allowed to file again. Secondly, a lender likes to see that you can pay for your basic needs, handle the potential debt you will be incurring, and still have money left over. After your Chapter 7 was granted, you had all or most of your debt cleared. So basically, you’re not as much of a risk to a creditor as you probably think.
It’s not as hard as you probably think to rebuild credit after bankruptcy.
The first thing you should do is obtain a copy of your credit score from one of the three major credit reporting agencies: Experian, Equifax, or TransUnion. Review it carefully and check for any errors. If there are errors, such as a debt that should have been discharged by your bankruptcy, contact the credit agency and work to resolve them.
The rest relies on getting back to basics. Do not be tempted to spend more than you are able to afford. Pay your bills on time and in full, including debts that were not discharged by bankruptcy (like student loan payments,
One of the biggest mistakes that people can make after bankruptcy, although understandable, is to avoid credit altogether. While it may seem like the better idea to steer clear of any new debts, this will not help you
rebuild your credit. Rather than avoiding it, find ways to use credit responsibly and in small measure. One way you can do this is to take advantage of a secured credit card that reports to one of the three credit agencies
and make regular, on time payments. Pay off the entire balance each month to avoid having to pay interest and to show lenders that you are not a risk. After a couple of years, this alone could result in a dramatic improvement
to your credit score.
Other methods for improving your credit score include opening up a new bank account or applying for a gas card. If you drive a car, gas is a necessity, so it pays to rebuild your credit through this kind of regular purchase. Signing up for automatic bill pay is another great way to rebuild credit because it will ensure that your bills are always paid on time.
It is important to stay patient during this process and to keep up with good financial habits. Make it a point to stay on top of your credit score, checking it as often as once a month. With all of your efforts, you should start seeing that number increase little by little.
Bankruptcy is not a financial death sentence. Rather, it is an effective way for over one million Americans annually to reboot their financial health. When you take the appropriate steps to fix your credit, you can enjoy financial freedom once again.
Developing a Sound Credit Strategy
Rebuilding credit isn’t hard, but it isn’t like building credit either. You’re not a risk to creditors because they don’t know anything about you. You’re a risk to creditors because you didn’t pay back the money you owed. Now, you just need a workable strategy on which to operate.
The first thing you want to do is check out your credit score. If there are claims against you that you think are false, then you can dispute those. More likely than not, those claims will still be valid. Just because Chapter 7 wipes out your debt doesn’t mean that it will cleanse your credit report as well. It’s just the opposite.
Secured Loans and Secured Credit Cards
Now starts the process of rebuilding your credit. You will find to find a bank or a creditor that is willing to deal with you despite the fact that you’re coming out of bankruptcy. To rebuild credit after bankruptcy you must establish a history of repaying loans.
One way to do this is by applying for a secured loan.
What is a secured loan? There are two different kinds. The first type allows you to borrow money against money you already have deposited. Usually, this type of loan is offered by banks or credit unions. That money will be inaccessible until you’ve paid off the loan.
The second type involves the release of a loan into a savings account that you cannot access until you’ve made a set amount of payments.
In other words, you’re “borrowing” money that you already have. In exchange, the bank agrees to send this information to credit bureaus. This new information will appear on your credit report.
Secured cards work much the same way where you borrow against money you have on deposit.
Co-Signed Credit Card or Loan
Apply for a variety of credit; credit cards, personal loans, mortgages and car loans will all help to improve your credit score and history after bankruptcy.
If you know someone who is willing to incur the risk, then having them cosign on a card or a loan is a viable way to rebuild credit after bankruptcy. Understand, however, this is a huge favor to ask. They are incurring the risk if you default.
Make sure you pay all of your debts on-time after bankruptcy. Late payments can do serious damage to your credit score and destroy all the hard work that went into rebuilding your post-bankruptcy credit. Make sure that any credit companies you do business with report to the major credit reporting bureaus. After obtaining a secured credit card and paying faithfully for a few months, apply for a secured line of credit. This can usually be obtained at stores for home goods, electronics, and other items. That way your on-time payments and the amount of credit you have been granted will be reported on your credit history. Do not abuse your credit lines after bankruptcy. One of the most common things debtors do after bankruptcy is go out and gouge themselves on credit/debt again. It is very important that debtors control their urge to over use credit cards and other debt instruments after they emerge from bankruptcy.
After filing bankruptcy, keep a budget and make an effort to pay ALL of your bills (ie rent, utilities etc.) on time.
Be prepared for financial emergencies. One of the biggest reasons that debtors end up in debt is that they do not have enough cash on hand to deal with an emergency that requires an influx of cash. After your bankruptcy discharge, make sure that you create an emergency savings stash equal to at least 3 months worth of expenses. This will come in handy for unexpected emergencies.Get insured. Medical bills and lawsuits related to car accidents can wipe out even an otherwise financially healthy debtor. By carrying adequate insurance post-bankruptcy debtors can avoid medical debt and accident related lawsuits.
Rebuild Credit After Bankruptcy: Final Steps
Eventually, an offer of credit will be extended to you. A credit card, for instance, with a $500 limit. Use this card, but pay it back on a monthly basis! Make sure your balance does not go over 30% of your limit and you will be well on your way to rebuilding your credit after bankruptcy.
Why Having A Co-Signer Is Not The Best Way To Rebuild Credit
Millions of Americans negatively impacted by job losses and battered credit ratings are looking for “easy” ways to rebuild their credit worthiness. One of the most recommended ways to rebuild credit worthiness is for a debtor to have a trusted (and credit worthy) family member or friend add them to their credit card. Credit “gurus” often suggest this method because by adding the debtor to someone’s credit card who has good credit the credit standing of the troubled debtor improves because of the good standing of the friend or family member. However, while in a perfect world this may work, there are some inherent risks for the debtor adding their name to the credit card of a friend or family member, even if that person has perfect credit.
- Any transactions on the credit card are the responsibility of both people whose name is on the credit card. What this means is that if that even if a trusted friend or family member charges up thousands of dollars worth of transactions on the credit card both parties are responsible for paying it back. The credit card company will not make a distinction between who charged what.
- If the primary credit card account holder defaults, the credit card company will come after the other person on the credit card account. For example, if your trustworthy friend or family member losses their job and is unable to repay the credit card, you will then become liable for the entire credit card balance. The credit card company will have a legal right to pursue payment from the secondary cardholder.
Before a debtor decides to add their name to someone else’s credit card, they need to make sure that they are willing to pay that person’s credit card debt in the case that something goes wrong and that person is unable to repay their debt.