According to Federal Bankruptcy Court statistics (uscourts.gov), in 2010, over 1.5 million people declared personal bankruptcy. The American Bankruptcy Institute (abiworld.org) reports that the majority were due to medical bills and job loss. Another popular belief is that once you’ve declared bankruptcy, your credit is permanently ruined. Nothing could be further from the truth. It is possible to re-build your credit and regain a positive credit score. In fact, by following the rules below, you may be able to become financially stronger than you were before your bankruptcy.
Get a Copy of Your Credit Report – This is critical and yet many people never consider this step. Wait 30 – 60 days after your bankruptcy has been discharged and then get a copy of your Trans Union, Equifax and Experian reports. Make sure all of the debts you discharged in your bankruptcy show a zero balance. If not, contact the creditor and ask to have the information corrected and get a letter stating you no longer have a balance. If they don’t respond, file a dispute with all three credit bureaus with a copy of your bankruptcy discharge. It’s best to do it now while you still have all the paperwork handy.
Make Savings a Way of Life – You are going to have problems getting credit for a while (more on that below). What happens when there are unexpected expenses, like home or car repair? It’s natural to feel a sense of relief when you lose the burden of bankruptcy or debt payments, but you’re not out of the woods yet. Your best practice is to keep making payments, but this time, make them to yourself. Set up a savings account and put money in every month that you can use for those nasty surprises that everyone has from time to time. You’ll no longer have to turn to credit cards.
Getting a Credit Card – We just said you’ll not have to turn to credit cards, and now we’re saying you need one? Having a credit card is a major convenience in modern life, if you know how to use it. Try renting a car or hotel room and you’ll see what we mean. Also, you may need one for an expense account for your job. A credit card is also a great way to re-build your credit score. You will start getting solicitations as soon as your bankruptcy is over. Take your time and shop for the lowest annual fee and interest rate. These will also be “secured” a card, which means you’ll have to put money into a special account as collateral. Look for a card that will allow you to grow the available credit over time without having to put up more money. What’s the critical part? Pay the balance in full every month!
Getting a Car Loan – You may think you can’t get a car loan for years after a bankruptcy. This isn’t true, but you do have to be careful. First, go as long as you can without buying a new (used) car. Make the largest down payment you can since this buys a lot of creditability with lenders. You’re going to pay a higher interest rate, but that large down payment may let you refinance the loan later as you show timely payments. A car loan will also let you re-build your credit. Finally, do not buy a car from a buy-here-pay-here dealer. You will pay far more than you should for the car, and they may not report to the credit bureaus, losing you the one advantage of getting a car loan. Above all, make your payments on time!
Getting a Mortgage – A mortgage is the best kind of debt to have on your report as it demonstrates stability and responsibility. If you kept your house through your bankruptcy you may want to refinance at some point. While it is possible to do this shortly after bankruptcy in some cases, as a practical matter it will be two years before you can get a new loan for most people (one year in the case of a medical-bill bankruptcy). The same goes if you want to buy a home. Remember, make the biggest down payment you can manage, and buy the least expensive home you can. Once again; make all your payments on time!
Avoid Credit Repair Scams – You will be flooded with offers to make your bankruptcy disappear from your credit history, or magically improve you score. These are all scams. Don’t fall for them! It will take ten years for the bankruptcy to fall off your credit report, but as each year goes by it will matter less to your score and others judge your credit.
Bankruptcy has been designed to give people a second chance. We can’t always help what happens to us, or the trying times that may come, but we can learn and prepare. Follow the rules above and use credit cautiously in the future and you’ll prove it is possible to bounce back from bankruptcy.