Rebuilding Your Credit After Bankruptcy

Is Bankruptcy Right for You?

If there ever comes a time when you are in such dire financial straits that bankruptcy seems to be a viable way to deal with the situation, it is a good idea to think carefully before moving forward.

Bankruptcy is not an uncommon event. According to statistics compiled by the Administrative Office of the U.S. Courts, non-business bankruptcy filings in which the debts are predominantly personal or consumer in nature totaled 1,267,167 from July 1, 2011 through June 30, 2012.

Before you join the ranks of bankruptcy filers, you need to make sure that you have considered all of your options. Bankruptcy is not something to be entered into lightly. If you are working with an attorney or credit counselor who is suggesting that you file for bankruptcy, be prepared to get a second opinion. In some cases, you may be able to negotiate a payment settlement with some or all of your creditors.

The Bankruptcy Abuse Prevention and Consumer Protection Act requires you to undergo credit counseling from a government-approved organization within 180 days before filing for bankruptcy. During this counseling session, you will have a chance to evaluate your personal financial situation, discuss alternatives to bankruptcy and develop a budget. You must also complete a debtor education course after you file in order for your debts to be discharged.

What You Need to Know

If you do decide to move forward with bankruptcy proceedings, make sure that you understand what that means for you right now and in the future. To state the obvious, bankruptcy can have a devastating effect on your credit standing.

A Chapter 7 bankruptcy remains on your credit report for ten years while a Chapter 13 filing remains on the report for seven years. Quite simply, it will take you a long time to rebuild your credit. It is important that you understand what bankruptcy means and what it entails. There are two types of bankruptcy–Chapter 7 bankruptcy and Chapter 13 bankruptcy.

In a Chapter 7 bankruptcy, you can lose some of your property if it is seized and sold to pay off some or all of your debts. Chapter 7 is the most common type of filing because it wipes out your unsecured debts, like credit card balances. However, certain types of unsecured debts, including child support, taxes and alimony payments will not be wiped out.

Only people with a reliable source of income and a certain amount of debt (as of 2009, the limit is $1,010,650 in secured debt and $336,900 in unsecured debt) are allowed to file for Chapter 13 bankruptcy. Chapter 13 requires you to work with the court to develop a three- to five-year debt repayment plan. The amount you will repay depends on a number of factors, including your income, how much you owe, and how much unsecured creditors would have received if you had filed under Chapter 7 instead of Chapter 13.

Q&A Video: How Do I Rebuild My Credit After A Bankruptcy?

Dealing With Bankruptcy

Once you file for bankruptcy, you will be legally required to complete a debtor education course. This is a good opportunity to gain the knowledge and skills you need to rebuild your financial life and avoid getting into trouble with debt in the future. Treat this course as an opportunity to learn rather than simply as a legal obligation. The course should include information on how to develop a budget, manage your money and use credit wisely.

Step 1: The Post-Bankruptcy Credit Check

The first step to getting on the right track and recovering from bankruptcy is to pull your credit reports from all three of the credit reporting agencies to verify that the bankruptcy — and all of the accounts included in the bankruptcy — are being reported accurately.

Accounts included in bankruptcy should show a record that the account was “included in bankruptcy”, and there should be no balances, past due amounts or late payments showing on the account after the bankruptcy filing or discharge date.

For Chapter 7 bankruptcies, you’ll want to take this step ~90 days after your bankruptcy filing to give ample time for the information to be updated in your credit reports. For Chapter 13s, you’ll want to take this step ~90 days after the bankruptcy has been discharged.

The purpose of this step is to review your credit reports to make sure your creditors are reporting each account/debt that was included in the bankruptcy. If you find errors, you’ll need to dispute them directly with the credit reporting agencies to have them corrected.

Step 2: Avoiding Past Mistakes

Once you’ve verified that your credit reports are accurate and up-to-date, it’s time to start rebuilding. To do this, you’ll first want to address any financial mistakes that may have led to bankruptcy in an effort to avoid making the same mistakes the second time around.

The goal of this exercise is to take a good look at your financial habits and any areas that may have contributed to previous credit problems. This may mean creating (and sticking to) a budget, living within your means, setting up a savings account and building a solid emergency fund as a financial cushion.

Step 3: Re-Entering the Credit Environment

The fastest and most effective way to recover from bankruptcy is to begin adding new, positive credit information as soon as possible. This won’t erase your bankruptcy, but it will help to offset the negative damage caused by the bankruptcy. This may mean starting with a becoming an authorized user on a family member’s well managed credit card, at least until your credit improves enough to qualify for a traditional credit card on your own.

Step 4: Developing Responsible Credit Management Habits

Opening a new credit account is only one piece of the puzzle when it comes to rebuilding your credit. Unless you manage the account wisely, opening a new account will do you little good. To be effective, you’ll need to develop responsible credit management habits that will stand the test of time. This means:

• Paying your bills on time, every time.
• Watching your debt balances, especially on your credit card debt. For the best results, keep your credit card balances to no more than 10 percent of the available credit limits.
• Limiting applications for credit. This means opening new accounts gradually over time — and only as needed. Opening too many accounts in a short period of time can backfire.

Step 5: Monitoring Your Progress

As you continue to work towards your credit improvement goal, you’ll want to monitor and track your progress. This can help keep you focused and on track, and also help you identify when you’ve reached your credit improvement goal.

There are several services that let you monitor your credit reports and scores online for free. Despite the misconception that the only way to recover from bankruptcy is to wait it out until the record falls off your credit report, there are better, more effective ways to rebuild your credit, and it doesn’t require waiting 7 to 10 years to make it happen. If you follow these foundational credit management rules, your credit scores will have no choice but to improve. Stick with it, consider the fundamentals, and your hard work will pay off.