You had to file for bankruptcy. Your credit score has tanked. What do you do now to rebuild your credit?
Roughly 752,000 cases of personal bankruptcy were filed in 2019 (Statistica.com). This is a vast improvement over 2010, when almost 1.6 million bankruptcies were filed.
If you had to file bankruptcy, you are not alone. With the legal work behind you, your focus now needs to be on how to rebuild your credit.
An Ounce of Prevention
Bankruptcy leaves its mark on your credit report for at least seven years. It doesn’t mean you won’t be able to access financing in the future, but you won’t get the best terms. You might also need cosigners on any loans that you take out.
The best prevention for bankruptcy is to create and follow a realistic budget, track your money and eliminate bad debt (credit cards). Improve your financial literacy and make paying yourself a priority. If you follow this strategy, you probably won’t need to figure out how to rebuild your credit after a bankruptcy.
When Might Bankruptcy be the Only Option?
One of the chief causes of bankruptcy is simply too much debt. This happens when you take advantage of many financing opportunities, leaving yourself with multiple debt streams such as consumer and auto loans, and credit cards. You have no idea how to pay it all. You start skipping bills, the debt collectors start calling, and ultimately, you find yourself facing debt collection litigation. At this point, you have no choice but to file bankruptcy.
Medical bills are another leading cause of bankruptcy. According to a Bankrate study, only 40 percent of Americans can cover a $1000 emergency. If you haven’t been able to save for emergencies, unexpected medical bills can completely upend your financial life. Even if you have been paying all your bills on time, budgeting and tracking your money, an unexpected medical emergency can take you to bankruptcy court. It’s a good idea to be sure about the details of your insurance coverage and try to invest in a health savings account.
Many consumers find themselves facing bankruptcy due to credit card debt. There are other strategies, such as transferring your debt to a single credit card or getting a debt consolidation loan. But if these options aren’t available to you, bankruptcy court may be the only way to get back on track.
Yes, there is life after bankruptcy
So now the question is how do you rebuild your credit after you have filed for bankruptcy?
First, let’s look at the impact bankruptcy has on your credit score. While filing for bankruptcy may feel like the most horrible thing you can do, going to collections litigation is much worse. A Chapter 13 bankruptcy typically remains on your credit report for 7 years, but it can stay up to 10 years. Chapter 7 bankruptcy usually stays on your credit report for 10 years.
After bankruptcy, your credit report will show your unpaid accounts as “discharged” or “included in bankruptcy.” They will still show up on your credit report, as mentioned, but not as a debt. This means that you can start to repair your credit score right away.
How to Rebuild Your Credit After Bankruptcy
#1 Keep an eye on your credit report.
Even though there is a bureaucracy to everything, there can be errors on your credit report. If you’ve filed for bankruptcy you want to be sure there are no mistakes. Check to see that your accounts are noted as discharged or included in bankruptcy. The accounts that were discharged in bankruptcy should show a zero balance. Check your report every few months and get in touch if the negative marks are not removed on time.
#2 Secured Credit Card
For now, your financing options are going to be more limited. But if you take small steps, you can slowly get back on track. A good way to rebuild your credit is to take out a secured credit card. It works like a regular credit card, but the limit is based on what you put on it. Make small purchases with your card, pay the balance in full and on time, and you will start improving your credit score.
#3 Retail Credit Cards
Taking out a credit card from your favorite retailers can be another way to rebuild your credit. However, be cautious. Typically, the interest rate and penalty fees are much higher. And, only charge what you can afford to repay every month.
#4 Become an Authorized User on Another Account
If possible, ask a family member or close friend to put you on their credit card account as an authorized user. You’ll get a credit card in your name but will benefit from the holder’s good credit history and score. However, if your friend suddenly falls behind in payments, harming his or her credit, then you will suffer too. So, you’ll want to be sure you hook up with someone you can trust to be financially responsible.
Bottom line. Bankruptcy is not the end of the road. By taking slow, cautious and deliberate steps you can rebuild your financial life in a positive way. You’ll find many tips on our blog on how to set financial goals, budget and save money.
