Your Guide to Rebuild Credit After Bankruptcy

Filing bankruptcy is one of the most difficult, and humbling decisions, any person can make. Unfortunately, with the state of the housing market and the crash in the early 2000’s, many found themselves with no other choice but to file bankruptcy and save their homes, their cars, everything they had worked so hard to achieve.

First, let’s decipher the types of bankruptcies. There are many types of bankruptcies, all defined numerically, but there are two in particular of note to individuals; Chapter 7 and Chapter 13. Typically, a person would file a Chapter 7 bankruptcy when they have no assets and/or nothing to lose (i.e. a home.) Someone with liquid assets may still file for Chapter 7 but the Trustee (the person in charge of your bankruptcy and who goes to court for and with you) may have the power to revoke those assets. If you have recently purchased a car, for example, the Chapter 7 Trustee may require you to turn over the car to the courts to be liquidated in order to pay your creditors. In a Chapter 7 bankruptcy, the debtor does not owe any money to any creditors once the case is confirmed in court and the case is swiftly dismissed. If you choose to file Chapter 7, you may not file another Chapter 7 bankruptcy for 10 years.

The other type of bankruptcy is a Chapter 13. This type is for those individuals who wish to keep their assets (homes, cars, etc.). In a Chapter 13 bankruptcy you will still be assigned a Trustee, however, based on your income level, you will be required to pay back a portion of the amount owed to your creditors over the course of 5 years. You could be required to pay back as little as 10% or you may be required to pay back 100% of what you owe your creditors. In a Chapter 13, you are allowed to keep your assets so long as you stay current on payments. Most debtors choose to have their assets paid through their bankruptcy. In a Chapter 13 format you pay a predetermined monthly amount to the Trustee’s office who in turn disburses those funds to the creditors that you owe. At the end of the 5 years, your case is dismissed and all creditors are considered paid in full; unless they are liquid assets at which time you would resume payment to those creditors.

You may be asking yourself what happens AFTER I file bankruptcy? The truth of the matter is that it can be very difficult to rebuild your credit and regain the trust of creditors after bankruptcies have been filed. There are some steps you can take to make the process easier on yourself and find the renewed confidence.

1. Take the financial course – and LEARN from it!

Each bankruptcy office requires that you take a course to learn how to budget or manage your finances properly in order for your case to be dismissed and for you to go on with your life. Treat that class as if it was the final class you needed in order to graduate on the Dean’s List in school. There is much to be learned from those classes that will help rebuild credit after bankruptcy. Unfortunately, most people do not pay attention and end up back in their old habits and in debt all over again. Which brings us to our next step.

2. Change your habits

Easier said than done, right? Spending money can be an addiction, it can be a curse, it can be cathartic, and it can also be extremely damaging. Rather than living “above your means” try living “below your means.” So what does that take? It takes a savings account. It takes a concerted effort to make sure that you do not fall back into your old habits and overspend. It means that you do not try and get credit cards right away; or if you do get credit right away, you do not max it out only to find yourself in a situation where you can no longer pay. It is crucial that habits are changed in order for to rebuild credit after bankruptcy.

Let’s say that you file Chapter 13 and you must pay your Trustee $1,000 a month. At the end of the 5 years most people will think Whoo Hoo! I have $1,000 more a month. DON’T think that way! Pretend that you are still making those payments. You learned to live for FIVE years without that $1,000 a month. If you put that money into a savings account each month you would earn $12,000 a year (plus the interest given on savings accounts.) That $12,000 turns into $24,000 and so on and so forth. Pretty soon you’re buying yourself things with cash; or better yet, you are buying things with great down payments and have the back up reserve money to pay all your bills while working to rebuild credit after bankruptcy.

3. Take advantage of the Secured Credit Card

Before you balk at the idea of a Secured card, let me explain something to you. It’s YOUR money on that card. YOU decide your credit limit. If you apply for a Secured Credit Card and put $500 on it then that is ALL you are allowed to spend (remember it is important to make the maximum amount the most you can afford to spend on credit cards in one month without harming your other bill payments.) Most Secured cards will take you off secured status between 6 months and one year should you make your payments on time. Once you have been taken off secured status you have an unsecured credit card, typically with a higher credit line, and you are well on your way to securing a better credit rating for yourself.

4. Pay all your bills BEFORE they are due, not WHEN they are due fa

Believe it or not, a due date isn’t just there for you to know when a payment may be considered late. It is also there as a reminder to you that you have a bill to pay by a certain time. If your due date is June 21, make sure you pay that bill by June 10. Every time you pay your bills before the due date you will notice an uptick in your credit rating.

5. Constantly check and correct your credit report

Unfortunately, some debts will still show up on credit reports even if they are being paid or have been paid by a bankruptcy. It is up to you to become your own advocate when things like that happen. You must report this to the credit agency immediately. Once the credit report has been corrected, your score improves almost immediately. It is up to you to monitor your credit rating. You are allowed to obtain one free credit report yearly from each of the major credit reporting bureaus. There are also quite a few apps available to you that allow you to check your credit for free and see when your score is rising or falling.

As your score rises you will begin to see new opportunities open up for you but remember Rule #2 – Change Your Habits! Don’t fall prey to the credit cycle all over again – don’t accept every single offer given to you. How your credit is affected is ultimately up to you and you must regain control of it to rebuild credit after bankruptcy.

For more information you can contact us or you can always read about ways to regain control of your credit here: Guide to Rebuild Credit After Bankruptcy