One thing that former presidents Abraham Lincoln and William McKinley have in common with Henry Ford, Walt Disney, Henry John Heinz, Mark Twain (Samuel Clemens), and Milton Hershey is that they all filed for bankruptcy after early setbacks. They all used their fresh starts to reset their finances and managed to reach great heights.
As millions of Americans increasingly find themselves struggling with soaring debt, filing for bankruptcy no longer carries the type of social stigma that it once did. Instead, it is often seen as the best solution for those wishing to make a financial “fresh start” from burdensome debts. As the Supreme Court put it in its 1934 landmark case of Local Loan Co. v. Hunt [1], bankruptcy “gives to the honest but unfortunate debtor… a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt.”
Even so, deciding to file for bankruptcy is not something to be taken lightly. It is essential to have proper guidance as to whether you qualify for filing for bankruptcy in the first place, and to be aware of all options and any anticipated consequences.
For example, some of the main benefits of bankruptcy, whether you file under Chapter 7 or Chapter 13, are that it will:
- Stop your creditors from aggressive collection action.
- Force all your creditors to the table to resolve your issues, even if they were previously unwilling to negotiate with you.
- Grant you valuable time to sort out your finances.
- Likely end in the discharge of debt once the proceedings conclude, with the total amount of debt discharged depending on the particulars of each case.
Bankruptcy, therefore, may offer you a clean slate in the sense that, once the proceedings are over and you get your discharge order, you will no longer be liable to your creditors for part of your debts. At the same time, however, it does not wipe clean your credit history as such. Your bankruptcy will be part of your public record and remain on your report for 7 to 10 years after filing. It will also inevitably affect your credit score for a while.
Even so, there is absolutely no reason you should not begin rebuilding your credit as soon as you get your discharge. Indeed, restoring your credit should be at the very top of your to-do list once you set the bankruptcy wheels in motion.
Taking the Right Steps
Although rebuilding your credit will not happen overnight, there is no reason to despair. Getting back on your feet is not only possible, but it may take less time than you expect. It is up to you to take the right steps and develop responsible financial habits: once you do so and keep at it, you should see change happening in a relatively short time after your discharge.
In practice, bankruptcy often leads to an initial drop in your credit score of 100 to 200 points or more, even though this will vary. Accordingly, the time that the credit repair process is likely to take will largely depend on how active you are in terms of improving your score. Generally speaking, if you take certain actions and develop healthier financial habits, you should see positive results within two to three years post-bankruptcy.
Some valuable tips for rebuilding your credit and speeding up your financial recovery after bankruptcy include the following:
1. Make Sure Your Credit File Is Correct and up to Date
Hiring an experienced bankruptcy attorney to look after your case is an excellent way to maximize the benefits you get from bankruptcy. Keep in mind, however, that your attorney will not be going through your credit report post-bankruptcy to update it. Ensuring that your credit report reflects the truth, i.e. that it does not contain incorrect or negative information that could continue hurting your credit, is something you need to keep on top of and a vital way in which you can help and protect yourself.
If you find any debt that was discharged but has not been recorded on your credit report, you should immediately dispute the information with your creditor. Ensuring that any errors are taken off your credit report can be crucial in terms of improving your credit faster.
Recent research suggests that, within one year of their bankruptcy, about 43% of people with a bankruptcy on their credit file have a credit score of 640 or higher. Within two years, the percentage of filers who have a credit score above 640 rises to 65% [2]. To this end, you must stay on top of things and monitor your credit report regularly, addressing any errors and inconsistencies in an effective and timely manner.
A good idea would be to monitor your credit report monthly. Make sure that positive changes in your financial behavior, such as paying your bills on time post-bankruptcy, are also being reported to the credit bureaus.
2. Get a Secured or Regular Credit Card
Even though there is no quick fix to damaged credit, there are several actions you can take toward the goal of repairing it. An obvious one is obtaining a secured or regular credit card. If this is not possible, request to become an authorized user.
The sole purpose of getting a credit card following your bankruptcy is to rebuild your credit. Therefore, you need to be extra vigilant in terms of keeping your balance low and paying it off on time and in full every month, without incurring any interest.
You may be unable to obtain a regular credit card shortly after your bankruptcy, although it is not entirely impossible. If that’s the case, you may be able to get a secured credit card. In this case, you will be using your own money as collateral, meaning that you will be asked to pay a refundable deposit (usually around $200). That amount will also be your credit limit. Secured credit cards operate as regular credit cards, but you will need to be very aware of the need to pay everything in full and on time, effectively proving your reliability and responsibility as a borrower.
Once you have been making timely payments for a while, and provided you fulfill any other qualifying factors that may be in place, your credit card company may allow you to “upgrade” to an unsecured credit card. Naturally, you will need to use it in the same, responsible manner described above.
If you are unable to get a secured or regular credit card shortly after your bankruptcy, another way to begin repairing your credit would be by becoming an authorized user on someone else’s credit card. This may be a more realistic option in some cases and involves having a card in your name, which is nonetheless attached to another borrower’s account. The payments on this credit card will appear on your credit report, so if they are made on time and the credit utilization rate stays low, your score should improve relatively fast.
Becoming an authorized user on someone else’s credit card is often simple. In most cases, you can even do so if you have no credit or poor credit, as the case may be in the initial period following your bankruptcy. Having said that, you should remain vigilant in checking that the primary cardholder is also responsible, as a failure on their part to make timely payments may also adversely affect your own credit score.
In all, what you need to keep in mind is that you should engage in the strategic use of credit cards that will help restore your trustworthiness in the eyes of lenders post-bankruptcy.
3. Apply for a Credit-Builder Loan
If you find yourself unable to obtain a traditional loan after your bankruptcy, another way to help you rebuild your credit is to apply for a credit builder loan. Although this type of loan is generally one of the more expensive ways to build credit, as you will need to pay interest, it can nevertheless be a useful tool in terms of acquiring a better credit score.
Unlike traditional loans, lenders of credit-builder loans hold a certain amount of money in a secured savings account or certificate of deposit in your (i.e. the borrower’s) name. You will then have to make monthly payments, including interest, until the loan is fully paid off. The difference with a regular loan is that your lender will place the related funds into an account that you won’t be able to access until you have paid off the loan completely.
Once your credit-builder loan is paid in full, your lender will release the funds to you and you will be able to spend your money in any way you like. Most importantly, every time you make your monthly payment, your lender will report this to the relevant credit bureaus. This, in turn, will be noted on your credit report, thus helping you build a solid payment history that should work to your benefit in terms of raising your credit score.
4. Apply for a Secured Loan
It is also possible that you might be offered the option of a secured loan, whereby you will be borrowing against any money already in your savings account. There are no hard and fast rules about this, and it will all come down to your bank, so it is definitely a possibility worth exploring before deciding to get a credit-builder loan.
In practice, one thing that may increase your chances of being approved for a personal loan is to apply along with a cosigner with a good credit score. If you can find someone you trust as a cosigner, your lender will be more likely to consider the strength of their fine credit score rather than focus on the weakness of yours. Indeed, this can be a double-win situation for you, as you will have both the benefit of having access to the loan funds straight away, while your timely payments will continue to be reported to the credit bureaus, thus helping you improve your credit score fast.
When acquiring a loan along with a trusted cosigner, it is equally important to do so only if you are certain that you can make all monthly payments on time: if you end up missing payments, your cosigner will be responsible for the outstanding loan balance, so their credit score will suffer alongside yours. Embarking in such an agreement is a big step, so you should think about it carefully and plan sensibly before moving forward.
5. Build an Emergency Savings Fund
Another thing you may wish to consider, challenging as it may be right after bankruptcy, is building an emergency savings fund. It does not have to happen right away or consist of a massive amount of money: you can always earmark a modest amount each month to build some emergency savings that will help you address unexpected expenses, such as having to pay any unforeseen bills or having your car repaired. In this way, you will be better placed to avoid incurring future debt that may slow down, or even reverse all your good efforts to rebuild your credit.
6. Develop Responsible Credit Habits
This is probably the single, most valuable, and all-encompassing piece of advice for rebuilding your credit after bankruptcy. In a nutshell, once you get your discharge and set out to rebuild your credit, putting (and keeping!) in place responsible credit habits should be your number one lifelong goal when it comes to your financial behavior. At the core of your new practices should be an understanding that you need to spend less than what you make, rather than outstretch yourself financially. A good starting point would be to set out an effective and realistic budget and stick to it, which will guide you through financial decisions.
Ηealthy financial habits are of the essence when it comes to improving your credit score, and involve all kinds of actions that you can take at your end. The most fundamental one is resolving to make consistent and timely payments, particularly as your payment history accounts for 35% of your FICO score calculation. In addition to this, you should also make sure not to overstretch your finances and take on more expenses than you can realistically afford, including staying on top of things like your utility bills.
If you manage to obtain a credit card, it is imperative that you make sensible use of it, clear your balance every month, and avoid incurring interest. Credit card debt is one of the main reasons why millions of Americans are led to bankruptcy each year, so it is crucial that you don’t repeat the same habits that led to your financial troubles in the past. The sensible thing to do is to have a credit card with the single purpose of rebuilding your credit, while limiting its use to the minimum and keeping your balance as low as possible.
Slow and Steady
Such steps as those described above should be taken with patience and solid planning. It may be best if you sought to increase your credit mix in stages. For example, you can start out by obtaining a secured credit card or becoming an authorized user on someone else’s credit card. Once this leads to building some positive credit, move on to apply for a loan. After this is repaid, start putting some money away to slowly build an emergency fund. All this, of course, while keeping on top of all your other payments.
Small, steady steps are much better than trying to do everything at once and risk being rejected or, worse, ending up accumulating new debt and eventually falling back on bad habits.
You must be particularly wary of credit repair scams claiming that they can put in place a new credit identity for you or erase your negative credit history for a fee. Rebuilding your credit takes time and perseverance and any offers that sound too good to be true are usually scams that you should steer well clear of.
The Future Is Bright
If you are one of the millions of consumers in the US who face severe financial difficulty and are either considering filing for bankruptcy or have already done so, you need to remember that bankruptcy is not an end: it is a beginning. Additionally, you can have solid support throughout this process and receive professional advice that will help you get back on your feet and rebuild your credit, as long as you are patient, disciplined, and determined to change certain past behaviors, thus giving yourself a chance at having a much brighter financial future.
Our legal team at Roemerman Law is committed to helping consumers make informed decisions about their finances. Book your free consultation today so we can go over your case and available options, in absolute confidentiality.
References
[1] https://supreme.justia.com/cases/federal/us/292/234/
[2] https://www.lendingtree.com/bankruptcy/the-cost-of-bankruptcy/
