Rebuilding Credit After Bankruptcy
Filing for bankruptcy is typically a last resort for those who can no longer pay their creditors and need a new start. Depending on the type of bankruptcy a borrower files, assets are liquidated to pay off debt and/or to create a repayment plan.
Bankruptcy will have a serious impact on your personal finances for many years to come, hindering your ability to get a mortgage, an auto loan or a credit card. If you file Chapter 13 Bankruptcy, where you repay a portion of your debts, your bankruptcy will remain on your credit report for seven years. If you file under Chapter 7 Bankruptcy, where you do not repay any debts, it will remain on your record for 10 years from the filing date.
Also, bankruptcy does not erase all of your debts. You still owe taxes, unless they are income taxes that are more than two years old and you filed under Chapter 7. You also will continue to owe your monthly mortgage payment if you own property.
Here are five tips for rebuilding your credit after a bankruptcy:
1. Reflect and regroup
The term “bankruptcy” often carries a negative connotation. Some people feel guilty or ashamed for filing for bankruptcy. However, the purpose of filing is to give you a second chance to restore your credit and to allow you the opportunity to manage your finances better. Filing for bankruptcy does not need to be an entirely negative experience if you learn from your past financial mistakes.
2. Create a realistic budget
The road to financial recovery after a bankruptcy is to exercise extreme vigilance once you get that second chance. Now is the time to create a conservative budget and stick to it. Your budget will act as your spending plan, help manage your cash flow and prevent you from accumulating unnecessary debt.
3. Pay your bills on time by automating your bills
Paying your bills on time is one of the single most powerful things you can do to rebuild your credit after a bankruptcy. It is a good idea to set up automatic payments for recurring bills so you don’t accidentally forget and make miss a payment. Paying your rent or mortgage on time is critically important to re-establishing your credit after bankruptcy.
4. Pick a credit card that will help you rebuild credit
After your bankruptcy closes, you will probably get many credit card offers in the mail. Part of the reason is because creditors know you cannot file bankruptcy again. However, the downside is that these credit cards usually have sky-high interest rates and expensive annual fees and are often not a good option.
Instead, look into getting a secured credit card where you can deposit a given amount of money. For example, you can deposit $500 into a bank account and that $500 becomes your credit limit on that particular credit card. By charging small amounts each month and repaying your debts as agreed, you can gradually rebuild your credit.
5. Manage your credit report
It’s critical to stay on top of your credit report after bankruptcy. It’s highly possible that there will be some mistakes.
If you do find errors, experts usually advise you to try fixing them on your own instead of hiring a credit repair company because it is cheaper and just as effective.