Making the decision to file for bankruptcy can be a good one for many people. It provides an opportunity for you to have a fresh start financially, but that does not mean the process is simple or easy. Recovering from bankruptcy is possible – you can have a strong credit score again in time. The best way to do that is to learn the strategies available to help you rebuild after your bankruptcy.
Start with Knowing Where You Are
A good starting point is to know what is happening with your credit report right now. You can obtain a free copy of each one of your credit reports from each of the three credit bureaus one time every 12 months. To do that, use the national website: AnnualCreditReport.com. This allows you to check your credit report for accuracy. Look for:
- Updates to any discharged loans and credit cards (they will have a notice about the bankruptcy filing)
- Which accounts do you still have that are reporting to the credit bureaus, such as car loans, home loans, and others (you’ll want to keep these in good standing by making on time payments)
- Ensure your personal information, including address and name, are accurate
This free credit report is a tool you have to ensure no one is reporting inaccurate information about you. For ongoing coverage, check one of these credit reports every four months, so you have a constant stream of information about what the credit bureaus have on file for you.
Save all Bankruptcy Case Documentation
All of the paperwork from your bankruptcy case is vital information for you. You may learn that, over time, a creditor is trying to collect on a debt that the courts discharged. It’s essential that you tuck away all of your bankruptcy paperwork so you can use it later if you need to do so. It may also be helpful if you are applying for a mortgage or other loan.
- The bankruptcy petition and schedule
- Proof of income information
- Social Security proof of income
- Discharge paperwork
- Any documents between yourself and your attorney or the bankruptcy court
Place these items into a file and store them where you can get to them if needed. Remember, they contain personal information, so you don’t want anyone to have access to them.
Work to Create a Budget
One of the most important things you need to do after filing for bankruptcy is to create a cash-based budget. This will allow you to know how much money you have coming in and going out and helps you to avoid spending more than you should. You will also want to have a budget that outlines when you need to pay bills, what your monthly income is, and what your cash flow is based on your monthly expenses.
With good personal finance steps like this, you can improve your overall ability to make wise financial decisions. That way, you can make the most of this fresh financial start.
Use one of the many budgeting apps to help you set up your budget. It’s an easy way for you to ensure you are making the most out of your fresh start. Free online services are available, too. Find one that you like to use that does not require any fees.
Open a Checking and Savings Account
If you do not have one yet, spend a few minutes opening a checking and savings account. Sometimes a new checking out is beneficial after bankruptcy because it ensures no one can pull money from your account that shouldn’t.
- A checking account that does not require a minimum balance
- A free checking account that does not have any associated fees
- One that offers online tools to help you manage your money, like bill pay and online transaction information
For a savings account, also look for one without minimum balance requirements or fees. You also want to be sure it’s offering the best interest rate possible. A high yield savings account down the road may be available to you to help you earn more from your savings.
Can you use online banks?
Yes, online banks can be a good place to get started. Some of these banks offer low fees and pay more in interest rates, too. That’s because they don’t have as much overhead (or cost to operate). They can pass down the savings to you. Do some homework. Review them and be sure they can provide for your needs.
Work to Save Money
The next step in this process is to start saving money. Your ultimate goal down the road is to put away 20% of every paycheck you receive into savings. Right now, that may be too hard to do. Aim for 5% or 10%.
Then, make this automatic. After you declare bankruptcy, one of the most powerful tools you will have for lenders is having money in a savings account. Yet, it’s not always simple to remember to save. That’s why you need to make it automatic.
Your bank can help you. When your paycheck is deposited, have your bank transfer a set amount of money into your savings account for you. This automatic process helps make sure you are saving.
As you begin rebuilding, remember that you may not have any of that old debt anymore. That means you may be able to save right away. You don’t want to overlook the importance of not creating new debt as well. Having a savings account makes that possible. That means the next time the car needs repair or other bad luck strikes, you have money available to help you.
Establish an emergency fund
An emergency fund is a very specific type of savings account designed to help you have money for emergencies, like car breakdowns. While your standard savings account will help you to build financial wealth over time for long-term goals like buying a house, your emergency fund is there to give you access to money in emergencies. Most people should aim to build at least a $1,000 emergency fund as a first step after declaring bankruptcy.
Work to Establish Credit Usage
This is one of the more complex parts of the process of rebuilding after bankruptcy. It is where you want to spend the most time. There are small and larger tasks you can take on right now to help you to build a strong financial footing. Work through each of these as soon as possible.
Make sure utilities are in your name
Some utility bills report to the credit bureaus. If you make on time payments, it means you have the ability to start working to reestablish good credit. For example, you may be able to qualify for a free cell phone plan. Sometimes, you can use other types of accounts like this.
If you have a phone bill or other debts, that could help you to build up your credit history and boost your financial recovery overall. There may be a waiting period, though, before some companies will allow you to use them. That’s okay. During this time, work with a cosigner who can help you. That helps you in the recovery process.
Consider a secured credit card
A secured credit card is a bit different than the standard credit cards you may have used in the past. With them, you will pay a deposit. That deposit becomes your credit line. You can then use the credit card like you normally would and make payments on the balance.
Here’s how it works. Let’s say you want to establish a $500 credit card. You find a secured credit card company, learn about any fees, and then make sure they report to the credit bureaus. You pay them $500. That creates your credit line for you. You can then spend up to $500. You will need to make payments on anything you borrow. As long as the service reports your payments on time, this can help to build your financial future.
Compare secured card offers carefully. Be sure you know the following:
- How much your limit is
- If the secured card is going to be listed on your credit report (you want it to be)
- Any fees associated with it
- That you can make timely payments
Make on-time payments for any outstanding debt
In some bankruptcies, you may choose to maintain the loan. The debt may not be included in the discharge. This is most common with home loans and car loans. If you maintain any debt like this, it is critical that you make payments on time.
A strong payment history with these lenders is going to give you the very best boost to your credit score in the coming months and years. How can you make sure you don’t miss payments?
- Create an online account for any outstanding credit accounts you have.
- Set up automatic bill pay within that account. This will allow you to never have to worry about missing a payment. It happens automatically.
- Work to pay down that debt over time, making at least the minimum payment or a bit more.
Consider a credit rebuilder loan
Your local credit union may offer a credit rebuilder loan. This is a type of loan that often offers a small amount of money that you can take out even if you have bad credit. The money isn’t just available to you, though.
Most of these loans are for about $1,000. Some credit unions will take the amount of money you borrow, say $1,000, and put it into a special savings account for you. It earns interest and grows in value there. You will then make fixed payments on the loan over the next 6 months to 2 years. During that time, your money grows in the savings account.
Every payment you make is documented in that savings account. Once you pay it all off in full, you can then access those funds again. The value here is that the credit union is reporting that on time payment every month to the credit bureau. That’s going to help you rebuild your credit.
Consider a new credit card
Over time, you will see your credit improve. Your credit score should improve every few months. That may mean you are able to qualify for a new credit card. In the recovery process, there are some very important things to know before you borrow money like this after filing for bankruptcy. Most importantly, you want to:
- Limit any available credit – you don’t want to over extend yourself and miss payments
- Consider the fees, including annual fees, which tend to be very high for those with Chapter 7 or Chapter 13 bankruptcy on their records
- Consider the interest rates – these are very high from most banks when it comes to those who are working to rebuild credit
If you take out a new credit card, do your research first. Compare several loan options from companies that typically work with those who have bad credit or a low credit score. Don’t apply for more than one new type of credit every six months. Too many applications will worsen your credit score.
After filing for bankruptcy, there is often a waiting period before you can take out new credit cards. But often, within 6 months, some of the most expensive lenders will become available. Remember that you don’t have to have credit cards, and they cost you money. That’s why you may limit your use of them.
Monitor credit scores
As you start to rebuild life after bankruptcy, you will need to keep an eye on your credit scores. This number is not always easily available. There are some free services that offer insight into your credit scores. Some mortgage loan lenders, banks, and credit card companies will provide you with your FICO score (one of the most important types of credit scores). Find out if any of the existing financial resources you have offer this. You should not have to pay to access them.
Check your credit scores every month or so. This is important if you have a repayment plan through Chapter 13 bankruptcy, too. When you file bankruptcy like this, you will have a repayment plan for 3 to 5 years that tracks your payments. You want to make sure your credit report is accurate throughout that process. It will impact your credit scores.
Take Advantage of Programs That Can Help You
After filing for bankruptcy, you may find yourself overwhelmed with all that there is to do and what steps you have to take to rebuild. There are some tools available that could help you.
Before filing for bankruptcy, you likely had to take a credit counseling course to help you with personal finance. There’s no reason not to keep up with that education. You can find a list of available programs that are recognized by the federal government for their quality. The U.S. Justice Department offers a range of approved agencies to help.
Know your rights
If a debt collector tries to collect a debt discharged in bankruptcy, you have rights. Being knowledgeable about your rights, as well as any debt collection methods, is good financial advice. One of the best resources for this is the Consumer Financial Protection Bureau. Use this to resolve problems with creditors, debt collector problems, and garnishments.
Learn how to rebuild your credit
The more knowledge you have about building credit, the better. The Federal Trade Commission offers excellent information about credit history, free credit report options, credit repair, and how to spot credit repair scams. You also will be able to find a great deal of information here about what you can and cannot do to rebuild your credit. This is also where you should stay up to date on any fraud alerts.
We’re Answering All of Your Questions
After bankruptcy, you may have a lot of concerns. This is a big process and one that is going to take some time. To help you, we have some of the most common questions people ask about how to recover from bankruptcy and the steps they can take to do so quickly.
Will credit repair help you?
After declaring bankruptcy, you should not need nor will you benefit from credit report services. You don’t need to pay anyone to improve your credit score – they cannot make changes beyond what’s inaccurate anyway. Instead, follow the tips here to work to rebuild your score over time.
Can your credit score recover from bankruptcy?
Yes, your credit scores will recover after bankruptcy over time as long as you make timely payments and use credit wisely. A late payment can hurt you the most, so be sure that, after filing bankruptcy, you have a clear path ahead to protect you from making mistakes such as growing your debt too much.
When can you get a car loan, personal loan, or mortgage loan after bankruptcy?
When you file for Chapter 7 or Chapter 13 bankruptcy, there may be a time when you are unable to obtain some types of loans. Often, after a Chapter 7 bankruptcy, there is a four year waiting period before you can obtain a federally backed mortgage loan. For a Chapter 13 bankruptcy, that is a two-year waiting period.
When it comes to getting a car loan or other personal loan, many lenders set their own terms and conditions for this. Many will not lend on unsecured loans, like a personal loan, until you have at least a year after your bankruptcy. A car loan may be easier to obtain within that first year because it is a secured loan on a valuable asset.
Remember that when you want to recover from bankruptcy, any loan like these available to you can drastically help you to improve your credit scores. For that reason, make sure you’re using these loans carefully.
How long does it take for bankruptcy to come off your record?
In most cases, it will take up to seven years to see bankruptcy come off your credit reports if you are filing Chapter 13. That is seven years from the discharge of the bankruptcy. However, it can take up to 10 years for this to happen for this to occur if you filed Chapter 7.
During this time, you may find it hard to obtain the credit you want. You may find a few things happening during this time:
- You may not be able to get a traditional credit card right away.
- If you obtain a secured card, you may have a very low credit limit.
- You are likely to have to pay annual fees and higher interest rates initially.
- The repayment period of some loans, like vehicle loans, may be more limited initially.
- Many banks will not be willing to loan to you at all.
That’s okay, it may take time to build up, but over the coming months and years, you will gain stronger financial health.
What happens 7 years after a bankruptcy?
At 7 years after bankruptcy, you may see less of an impact from this notation on your credit report. Many banks are more interested in your payment history in the work you have done after that at this point. Also, you are likely to see Chapter 13 come off your report altogether. Use credit reports to help you monitor these changes. If you find that anything is inaccurate on your credit report, be sure to report it to the appropriate credit bureau, too.
Establishing and Building Strong Financial Goals
As you work towards rebuilding your financial future, take the time to realize just how much opportunity you have right now. It may seem really hard to obtain credit or to get a decent credit limit on a new loan. Yet, that’s going to encourage you to develop stronger financial goals for yourself, often saving you money.
You may have lost a lot of nonexempt assets, and you may not have much on your credit report right now, but if you establish a few goals for yourself and continue to work towards building them, you’ll find your future looks bright, and you may have many opportunities you didn’t have prior to filing.