Rebuilding credit after bankruptcy

Filing for bankruptcy is typically a last resort for those who can no longer pay their creditors and need a new start. Depending on the type of bankruptcy a borrower files, assets are liquidated to pay off debt and/or to create a repayment plan.

Bankruptcy will have a serious impact on your personal finances for many years to come, hindering your ability to get a mortgage, an auto loan or a credit card. If you file Chapter 13 Bankruptcy, where you repay a portion of your debts, your bankruptcy will remain in your credit report for seven years. If you file under Chapter 7, where you repay no debts, it will remain on your record for 10 years from the filing date.

Also, bankruptcy does not erase all of your debts. You still owe taxes, unless they are income taxes that are more than two years old and you filed under Chapter 7. The IRS may agree to a payment plan reducing your obligation. You also will continue to owe your monthly mortgage payment if you own property. Your lender may be willing to modify your mortgage, but that will depend in part on your ability to make monthly payments on time.

For these reasons, and because you no doubt want to move on with your life and rebuild credit, you will need to change your financial habits immediately. Delaying will only postpone the day when your record is clean and you can enjoy the privileges of good credit.

Here are five tips for rebuilding credit after a bankruptcy:

1. Reflect and regroup

The term “bankruptcy” often carries a negative connotation. Some people feel guilty or ashamed for filing for bankruptcy. However, the purpose of filing is to give you a second chance to restore your credit and to allow you the opportunity to manage your finances better. Filing for bankruptcy need not be an entirely negative experience if you learn from past financial mistakes.

2. Create a realistic budget

The road to financial recovery after a bankruptcy is to exercise extreme vigilance once you get that second chance. Now is the time to create a conservative budget and stick to it. Your budget will act as your spending plan, help manage your cash flow and prevent you from accumulating unnecessary debt.

Sometimes that means making decisions like giving up cable TV and eating out or otherwise limiting spending. It may be difficult at first, but budgeting is a necessary step to recovering from bankruptcy.

3. Pay your bills on time/automate your bills

Paying your bills on time is one of the single most powerful things you can do to rebuild your credit after a bankruptcy. It is a good idea to set up automatic payments for recurring bills so you don’t accidentally forget and make a misstep. Paying your rent or mortgage on time is critically important to re-establishing your credit after bankruptcy.

4. Pick a credit card that will help you rebuild credit

After your bankruptcy closes, you will probably get many credit card offers in the mail. Part of the reason is because creditors know you cannot file bankruptcy again. However, the downside is that these cards usually have sky-high interest rates and expensive annual fees and are often not a good option.

Instead, look into getting a secured credit card. With a secured card, you deposit a given amount of money, for example $500, into a bank account and that $500 becomes your credit limit on the credit card. By charging small amounts each month and repaying your debts as agreed, you can gradually rebuild your credit.

Most major banks offer secured cards and some companies will reward responsible borrowers by increasing the limit without an additional deposit.

There are a few important things to know about secured cards:

Not everyone qualifies for a secured card, especially if your bankruptcy is less than a year old.
Stay away from secured cards that charge high fees or don’t report your payment history to one of the three major credit bureaus.

5. Manage your credit report

It’s critical to stay on top of your credit report after bankruptcy. You should obtain your credit report 60 days after your bankruptcy case closes to check for any errors. It’s highly possible that there will be some mistakes.

If you do find errors, experts usually advise you to try fixing them on your own instead of hiring a credit repair company because it is cheaper and just as effective. Anyone has the right to dispute inaccurate or incomplete information on their credit report, and the credit-reporting agency must investigate the dispute without any fees.

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