Rebuilding Credit After Bankruptcy
Filing for bankruptcy is a serious blow to anyone’s credit; however, it is possible to rebuild your credit standing within a reasonable amount of time. The amount of time it takes to rebuild your credit varies from person to person; but, for for most who file, bankruptcy is actually the first step on the road to rebuilding your credit standing rather than the last.
When deciding to file bankruptcy, it is important to understand that Bankruptcy can remain on your credit report for up to 10 years. However, when you consider that a collection lawsuit, repossession, or foreclosure will also remain on your credit report for the same period of time; bankruptcy may be the best option since the bankruptcy eliminates your obligation to the underlying debt. This is an important consideration when you consider that in a repossession, you will be responsible for the remaining outstanding balance. Moreover, although a bankruptcy may stay on your credit report for 10 years, it will only take a few years after a bankruptcy discharge to rebuild your credit.
Step 1: Filing Bankruptcy
Believe it or not, the bankruptcy discharge itself, which liquidates all, or most of your actual debt, improves your income-to-debt ratio instantly. This, by itself, will help to increase your credit score.
Step 2: Obtain Credit and Use It
After your discharge, you will receive credit card and other solicitations fairly shortly. Most of these will be high-interest, low limit credit cards. Normally, I would recommend that you avoid these offers like the plague; however, it is a simple truth that you have to be in debt to establish credit. Therefore, I recommend that you obtain one of these cards and actually use it, sparingly.
Bankruptcy eliminates your past credit history. Therefore, you must establish a new credit history to rebuild your credit score. By using the card and making payments, you will establish a new credit history. Your use of credit is reported to the credit bureaus and will help accomplish this goal.
Step 3: Stay Current and Lean From Your Bankruptcy Experience
I hope that Bankruptcy was a learning experience. Follow these rules when using your credit card.
- Do not use your credit card if you do not have the money to repay it. A credit card is a tool; not a crutch.
- Use your credit card only for emergencies or large necessities and don’t use it again until the balance is paid.
- Never carry a balance on your card more than two months of disposable income.
- Pay more than your minimum balance. If you cannot afford to pay more than your minimum balance, then you can’t afford a credit card and should wait to try to rebuild your credit.
- Never transfer a balance unless you actually intend to close your account with the card you are transferring. Most people get in trouble by transferring balances and then running up a new balance on their old card. GET RID OF IT!
- Do not get a “store card." The cards you get from Home Depot, Macy’s, and Target have interest rates that usually exceed 30% and cannot be used anywhere else. Stay away from them!
- YOU DON’T NEED MORE THAN ONE CREDIT CARD; EVER!
As time goes by, you will begin to rebuild your credit score. You can eventually replace the high interest credit card with one that has better terms. However, don’t start overextending yourself. Learn from your bankruptcy experience!
Step 4: Avoid Credit Traps
Credit card companies are sneaky. They will offer all sorts of “offers" such as “90 days same as cash" or “no interest for six months." However, don’t fall for these traps. Ninety percent of consumers do not repay the principal balance within the “interest free" period and if you have even $1 left owed on the principal, you will be charged interest on the entire balance. For example, if you purchase a dishwasher for $500 with no interest for six months. At the end of six months you still owe $5.00; the credit card company will then charge you the full six months interest on the entire $500 purchase.
Step 4: Monitor Your Credit Report
As a Massachusetts resident, you are entitled to 2 free copies of your credit report from each of the credit reporting agencies per year. Therefore, you should monitor your credit report every six months. If you find an error on your credit report, or find that a creditor that was discharged in bankruptcy is still reporting, you should report the error with the credit reporting company. If you still have problems fixing the error, you should contact your bankruptcy lawyer who will probably be able to help you.
This is by no means an exhaustive list; but just a guide. Credit is a two edged sword and should be used wisely. If you obtain new credit and do not control your spending, then you will likely be back in the same boat that you were in when you filed bankruptcy in the first place; only you will not have the option of filing again for 8 years. If you live in Massachusetts and you are considering bankruptcy, please feel free to contact us. Your consultation is free.