How Do I Handle My Credit After a Bankruptcy?

A bankruptcy can devastate your credit score upon filing, but it’s not all doom and gloom after that. Sometimes filing for bankruptcy can drop your credit score upon filing, but upon receiving a discharge and having some of your debts discharged, your credit score can jump up even higher than what it was prior to filing. This is usually the case when you are starting with a very low score prior to filing. If your score is fairly high upon filing, the score will not likely improve upon your discharge but you can still rebuild your credit, it’ll just take some time.

In this blog post we’ll address some of the challenges you’ll face concerning your credit after bankruptcy. We’ll also discuss what you can do to rebuild your credit as quickly as possible.

What Does Bankruptcy Do to My Credit?

The precise effect will depend on many factors, such as the type of bankruptcy you file and the amount of debt that gets discharged. In a Chapter 13 specifically, the more accounts and amount of debt you get discharged during bankruptcy, the more negative effect it can have on your credit history. However, getting rid of the debts in a Chapter 7 can also raise your credit score if it was low to begin with and even though your score drops upon filing, with a Chapter 7 it can get a slight bump upon your discharge. This is due to the debts getting wiped clean and you now having less debt.

After filing bankruptcy, it can be more difficult to obtain certain types of loans and forms of credit, such as credit cards. And if you do get approved, you can be subject to less favorable terms, such as higher interest rates. Again, this depends on how your credit is prior to filing. If your credit is already devastated prior to filing any type of bankruptcy, then this difficulty might not be much different from the state you were in before but without all of that crushing debt.

A Chapter 7 bankruptcy will stay on your credit report as a part of your credit history for 10 years and a Chapter 13 will stay in your credit report for seven years. This is not just applicable to bankruptcy filings since any missed payments or payments made that are reported stay on your report for a long time too as part of your overall credit history. This long period of having a bankruptcy on your record seems like an eternity, but the negative effects will lessen over time. In fact, it’s possible to get a credit score above 700 three or four years after your bankruptcy. How can you do this? Below are some of the steps you can take to rebuild your credit.

Continue Making Timely Payments on Your Credit Accounts

If you’re filing for bankruptcy then you already know that not all debts are dischargeable, such as student loans. So the first thing you can do to improve your credit history is to continue making these payments on time. Not only does it show a positive payment history, but it will improve your debt-to-income ratio. Discharging debts in bankruptcy also improves your debt to income ratio as well which is why it can actually help your score sometimes, especially if your credit is already low prior to filing. With a debt-to-income ratio, the more income you have in relation to your debts, the better your credit can be.

Open a New Credit Account

This isn’t as hard to do as you think. There are several options available to borrowers who have recently gone through bankruptcy.

One of the best options is a secured credit card. These work like regular credit cards, but before getting the credit card, you have to make a deposit with the credit card company. If you don’t pay off your credit card, they get to keep the deposit.

If you apply for one of these secured credit cards, make sure your credit card company reports your account information to the credit reporting bureaus (Experian, TransUnion and Equifax). You want to get credit for making on-time credit card payments.

Another option is a credit builder loan. Many banks offer these “reverse loans” where you make monthly payments into an account over time. Then after the payment term ends, you receive the money you paid into the account.

Don’t Overuse the Credit That You Have

If you can open a credit card, keep your credit utilization under 30% or so. Yes, you can borrow up to your credit limits but the closer you get to that limit, the more nervous creditors become. So if you want to boost your credit score as much as possible, just use a modest portion of your available credit.

Keep a Steady Job

Maintaining continuous employment isn’t factored into your credit score. However, many creditors and potential lenders prefer to lend money to individuals with a reliable income stream. If you can’t hold a job for more than a few months at a time, it makes lenders less likely to loan you money. Or if they do, they’ll approve a smaller amount or charge higher interest.

Obtain a Co-Signer for a Loan or Credit Line

If you’re having trouble obtaining a particular type of loan, consider asking a friend or family member to co-sign for you. This is a process where the co-signer agrees to pay for your debt if you are unable to.

Lenders are far more likely to approve a loan when they know there’s someone else they can go after to pay off the debt if you can’t. Having a co-signer will still allow you to open a credit account under your name and receive the benefits of improving creditworthiness.

If asking someone to cosign is too much, ask to become an authorized user on a credit card account. This won’t rebuild your credit as quickly, but if you ask the credit card company to report activity from authorized users to the credit reporting bureaus, it can help improve your credit history.

Keep an Eye On Your Credit

You’re entitled to free credit reports each year. Specifically, you can get one free report from each of the major credit reporting bureaus every year. It’s a good idea to stagger them so you pull one report from one credit reporting bureau every three to four months. That way you can track your credit history throughout the year.

Checking your credit is a good idea for anyone, even those who haven’t gone through bankruptcy. However, it’s especially important for those who have, as there may be mistakes that make your credit look worse than it really is. For instance, there might be a discharged debt that still shows up as active and late.

Be Responsible With Money

This should go without saying, but if you’re trying to rebuild your credit after bankruptcy, you need to practice good money habits. This means paying all your bills on time and in full. If possible, you should create an emergency fund with a little bit of extra cash to cover expenses when something unexpected happens. Sometimes, it’s an unexpected bill that starts the cycle of debt that leads to filing for bankruptcy.

Have More Questions About Bankruptcy?

The above shows that as bad as bankruptcy seems to be to many people, there’s still plenty of ways to rebuild your credit and improve your financial situation. To learn more about the bankruptcy process and what it can mean for you and your credit, please reach out to a Selma bankruptcy attorney or a local bankruptcy attorney wherever you reside.