Rebuilding Credit After Bankruptcy

Sometimes people make mistakes when it comes to business decisions, resulting in debts that are simply impossible to repay. This forces them to make the uncomfortable decision of filing for bankruptcy. Doing so is never an easy decision, but it does offer some relief. It allows them to start from a clean state from a financial point of view where they do not owe any more debts. However, this also means they’ll have to face higher rates when taking a loan or using a credit card. This is because the bankruptcy process has damaged their credit score.

This impact can be pretty distressing for people as they think there’s no way they can rebuild their credit. If you’re someone who’s in the same boat, we’re here to reassure you that it isn’t the end of the world. You can undoubtedly begin rebuilding your credit, even if the process will be challenging at the start. This article will discuss 7 ways to do so after filing for bankruptcy. Let’s dive in.

1. Having a stable job.

Having a stable job is a great way to boost your chances of getting a loan. A steady job tells the loan provider that you have a consistent income which means there’s a higher chance of you repaying the loan. Lenders will not look to you kindly after bankruptcy, so you must get on their good side as much as possible. Therefore, avoid job-hopping as this may show a gap in your income.

2. Check your credit report.

To get started on rebuilding your credit, you should familiarize yourself with your credit report. You can access weekly free credit reports online courtesy of the coronavirus pandemic that has left many people’s finances in uncertainty. The report can tell you when bankruptcy has been removed from it so you can start working on your credit score.

3. Keep an eye on your credit score.

Bankruptcy can cause a significant drop in your credit score, usually between 100 to 150 points. After that, you will want to work on raising this score. Therefore, monitoring it from month to month can help you see if any actions you are taking are helping to increase your credit score. Additionally, you want to do this to ensure that there aren’t any fraudulent loans being handled in your name, like an online loan, which could hurt your credit score.

Pull a copy of your credit reports from all three credit bureaus. Review the credit reports to ensure all of your eligible debts are reported as included in chapter 7 bankruptcy.  Creditors are not required to update your credit report, however, most do. Some creditors will simply remove the debt from your credit and others will leave it in collection status. If you find any debts in collection status, you should file a dispute with the credit bureaus. This site makes it easy to pull your credit and file disputes. You can also hire a company to file the disputes for you which costs about $100 total.

4. Consider taking credit builder loans and secured credit cards.

Credit builder loans are used to build credit and do not require the qualifications of average loans. With this loan, the lender holds a certain amount of money in a savings account while the borrower makes monthly payments with interest. This can help build your credit score as they will report this activity to major credit bureaus.

Once you have cleaned up your credit report, you can start applying for new accounts. If you do not have a relationship with a credit union (CU), you may consider opening an account with one. Once you have an established checking or savings account, you can ask the CU about secured credit cards. A secured credit card requires a deposit. If you want a $1000 credit line, you need a deposit of $1000. The secured credit account will report to the credit agencies just like any other revolving account. It is best to keep your credit utilization below 50% of your credit limit. Wells Fargo and Discover also offer secured cards.  After two years, most CU’s and Banks will convert the card to an unsecured credit card and refund your deposit. Additionally, most will raise your credit limit each year.  Try to open at least three revolving accounts after filing bankruptcy.  You should get started on this process right away because the longer an account shows on your credit the more it helps your score.

5. Practice responsible credit habits.

Healthy financial habits can make a lot of difference in helping rebuild your credit score after bankruptcy. You want to be consistent with them so that your efforts bear fruits by steadily improving your score. Remember to be patient. Some of the habits you can cultivate are:

• Make payments on time.
• Reduce credit card usage.
• Be patient.
• Build an emergency savings fund to avoid taking loans.

6. Get a secured credit card.

Strategically using a secured credit card can help build trust with lenders. Taking a secured credit card involves making a refundable security deposit and borrowing against it. These cards typically have high-interest rates, but this goes in your favor if they report to major credit bureaus. However, we recommend using this responsibly as you do not want to get into further credit problems.

7. Think twice before working with credit repair agencies.

Many agencies out there will make big claims that they can fix your credit scores. However, remember that these credit repair companies do stuff you are already capable of doing. They simply make the task a lot easier, but they will also charge fees in doing so. Therefore, instead of working with them, you could increase your emergency funds and savings to help prevent situations that led you to bankruptcy.

Additional Tips for Rebuilding Credit

Bankruptcy can be a difficult decision to make for most people. It can offer a new financial slate but severely affect credit scores, making getting a loan difficult. There are various ways one can rebuild their credit after bankruptcy, as seen in this article. It can be difficult at first, so you must be patient and take your time. We hope this article proves insightful and aids you in the process of recovering from bankruptcy.

It is possible to rebuild your credit within two years after filing bankruptcy if you are proactive about it. Although the bankruptcy will still show on  your credit well after two years, it is just one of many items that factor into your overall credit worthiness. Further, your actual credit score (FICO score) may not be the only factor lenders rely on for credit worthiness.

Before your bankruptcy discharge enters, you may want to consider signing reaffirmation agreements on auto loans and home loans. When you file bankruptcy, the note is discharged. However, the lien on the vehicle or home remains unless you sign a reaffirmation agreement. If you do not sign a reaffirmation, the lender will not report your payments to the credit bureaus. Instead the lenders will report the debt as discharged in bankruptcy even though you are making payments. This is because you discharged the note but not the lien. Signing a reaffirmation will help you rebuild credit because the payments will be reflected on your credit reports. The loan will not show as included in chapter 7.  Signing a reaffirmation brings the debt out of the bankruptcy. You will be responsible for any resulting deficiency balance if the loan is not kept current.  Therefore, you should have stable employment and/or adequate equity in your home or vehicle before signing one. To learn more about reaffirmation agreements and the pros and cons, read the article to reaffirm or not to reaffirm. 

You can begin rebuilding credit once you receive a discharge which is entered about 90 days after your case is filed.

If you have student loans that are in default, you should do your best to bring them in good standing. The government offers student loan repayment programs that can help make your federal student loan payments more affordable such as the income based repayment (IBR) program. There are some advantages and draw-backs to each program.  I am very well versed in all the available programs and offer a flat-rate consultation to review your options.

If you follow the steps above, you should have a credit score in the high 600s to low 700s within two years of receiving your bankruptcy discharge. You can then use your good credit score to apply for a mortgage or refinance. You are eligible to apply for an FHA or VA loan within two years of the date you file bankruptcy and within four years for most conventional loans. These time periods may change. Contact a mortgage broker for more information.

Please do not skip the credit rebuilding process. It’s important not just for your financial well-being but for your mental and emotional well-being. 

Finally, there are several companies who provide credit improvement services. CreditCards.com has created a guide to help Hispanics, and Black Americans rebuild credit, overcome financial barriers, and why to find the right credit union. The Wall Street Journal has a good article about consumer credit repair.