4 Tips for Rebuilding Credit After Bankruptcy
Thinking of filing for bankruptcy to eliminate overwhelming debt? You’re not alone. These days, more than one million Americans find debt relief through bankruptcy each year.
Fallout from the recession has left countless U.S. families drowning in debt. But there may be a silver lining: The tough economic times have helped shatter previously-held myths about bankruptcy, myths that once kept people from filing - and achieving much-needed financial freedom.
While many folks once avoided bankruptcy out of fear it would ruin their credit, it’s now widely recognized that rebuilding credit after bankruptcy is not only possible, but probable. In fact, for those with significant debt loads, bankruptcy can be the single best tool for repairing credit damage resulting from delinquent debts.
While it’s true that a bankruptcy filing will stay on your credit report for up to ten years, it’s just one small piece of the puzzle that makes up your credit rating. The biggest factors influencing credit include late payments, the number of accounts you have open, the number of times you have applied for and/or been denied a new credit card, the amount of credit you use, and – of course – the amount of debt you carry.
By lowering debt, allowing for timely payments, and reducing reliance on credit, bankruptcy addresses many of the underlying causes of unmanageable debt, paving the way for improved finances – and credit scores.
Of course, bankruptcy alone won’t boost your credit. What it can do is provide the breathing room you need to begin fixing the problems that led to debt in the first place. Once you’ve filed for bankruptcy, it’s up to you to take the steps necessary to rebuild your score. Here’s how to get started.
Review your credit report
A recent Federal Trade Commission report estimated that as many as 42 million Americans have errors on their credit reports. Mistakes range from incorrect personal information, such as a name or address, to the inclusion of debts you may not actually owe. After filing for bankruptcy, order a copy of your credit report from each of the three credit reporting bureaus (federal law entitles you to one free report per bureau per year from AnnualCreditReport.com). If you find errors, notify the credit reporting company in writing. Fixing even small mistakes may have a noticeable impact on credit.
Pay your bills
Missing payments is the fastest way to damage credit – and a common thread among people who file for bankruptcy. The good news is that making payments on time will slowly but surely allow your credit score to recover. Bankruptcy can help by eliminating debt, but the relief won’t last if you fall back into old habits. Create a plan after bankruptcy to ensure you don’t get behind on payments again, whether it’s making a budget, cutting out expenses, or automating payments so you don’t forget bills – whatever it takes to help you stay in control.
Most people don’t end up with overwhelming debt because they’re careless spenders. Instead, debt often accumulates when consumers are hit with a series of unexpected expenses – from car problems to medical costs to layoffs. The solution? Savings. Having an emergency savings fund – even a modest one – can keep you from immediately turning to credit when times get tough. After eliminating debt with bankruptcy, make an effort to start socking away savings. It can eliminate a lot of debt (not to mention stress) in the future.
Use credit – within reason
While it may seem counterintuitive to use credit when it was credit that got you into a bind in the first place, it’s an important step in rebuilding your score – so long as you use it wisely. Managing credit cards, car loans and other forms of credit shows lenders that you’re responsible, and thereby less of a credit risk. Many of our bankruptcy clients find they receive credit card offers shortly after completing their bankruptcy case. However, because interest rates can be high initially after filing, a secured card may be a safe place to start.
The bottom line
With time and effort, it really is possible to enjoy a higher credit score after bankruptcy than before. Bankruptcy may not be a quick fix, but when you’re in over your head in debt, it can be your best shot at regaining control over your finances – and your life.
To find out if bankruptcy is right for your financial situation, contact DebtStoppers today for your free one-on-one debt evaluation with an experienced DebtStoppers bankruptcy attorney.