6 ways to recover from bankruptcy
Going bankrupt can feel like you’ve hit rock bottom. Although it wipes out your old debt, bankruptcy stays on your credit report for seven to 10 years, hurting your long-term chances of qualifying for a mortgage or other credit.
Despite the hardships you will endure, there are several ways to recover from bankruptcy. Here’s what you need to know.
1. Make a budget
Budgeting can be difficult, especially if you’ve never created one or tracked your money before. But the first step in good money management is actually managing your money.
Whether it’s through a spreadsheet or your favorite online platform, there are plenty of ways to track expenses and income. To get started, figure out all of your fixed expenses, such as your mortgage payment, your house bills, insurance, and whatever else you need to pay monthly. Make sure your budget can cover all of these costs.
Then calculate your other needs, such as food, clothing, and entertainment. Leave room for discretionary and emergency savings, but make sure your projected spending is within your means.
“Planning and maintaining a budget is the cornerstone of effective money management,” says Amy Maliga, financial educator at Take Charge America, a Phoenix-based nonprofit credit counseling agency. “In its simplest terms, a budget helps you keep track of how much money you get in, how much out and exactly where it’s going. Keeping track of a budget helps you identify where you are overspending and encourages you to take action to reduce certain expenses.
Open a Bankrate account to categorize your spending transactions, identify ways to reduce and improve your financial health.
2. Start using cash
Having a limited amount of cash on hand will keep you on budget and prevent you from overcharging more than you can afford with a credit card.
While you don’t need to use cash on every purchase, prioritizing spending with cash can help save you money. For example, you can think twice about buying extra snacks at the grocery store if you find yourself running out of a few dollars for necessities like eggs or milk. When your money is used up, it’s gone.
“When recovering from bankruptcy, it’s important to change your spending habits,” says Maliga. “This includes transitioning to a cash-only lifestyle and reducing your reliance on credit cards. This will be easier to do if you plan a budget and designate a fixed amount that you are allowed to spend in each category. Once you have spent this amount, there is no expense in that category until your next payday, or you transfer money from another expense category.
And keep in mind that using cash may be temporary for you. This is a good step to help alleviate overspending, and once you’ve got your budget under control, you can reintroduce the cards.
3. Pay diligently on time
On-time payments are an important part of your credit history, accounting for 35% of your overall score. Late payments tell lenders that you are not responsible enough for your money. They also make lenders wary of lending you money in the future.
“Paying every bill on time, every time, is key to rebuilding credit after going through a period of financial distress such as bankruptcy, debt settlement or credit counseling,” says Michael Micheletti, communications director for Freedom Financial Network, a research organization and consulting firm. “It pays, literally. “
To help you in this effort, set up a system that allows you to pay all of your bills when they are due. Many people find it helpful to set a calendar alert the day before a payment to prevent unintentional missed payments. Setting up automatic payment whenever possible can also help you avoid missed payments and alleviate the stress associated with forgotten payments.
4. Add positive accounts to your history
After coming out of bankruptcy, you may have trouble qualifying for lines of credit, a credit card, or a loan. To improve your chances of getting approved for a line of credit from a lender, you can add positive accounts and current bills to your credit history. Not everything is eligible and some bills are more difficult to add than others, but it can help you later when you apply for new credit.
Utilities, for example, are not required to report your bills to credit bureaus since they are not official credit accounts. But Experian offers a tool, known as Experience boost, which allows customers to include certain utility and telephone bills on their Experian credit reports to help increase their credit scores. TransUnion and Equifax do not currently offer this service, and it does not affect their credit report scores.
This is a useful tool for anyone with a low or no credit rating, and especially useful if you have filed for bankruptcy.
“Accounts with a good payment history, such as on-time payments, have a significant impact on credit reports and credit scores,” explains Micheletti.
5. Try a secure credit card
A secured credit card, available to those with a credit score of less than 600, can help people rebuild their credit after filing for bankruptcy. Secured cards have a credit limit based on the money you deposit as collateral. If you can put in $ 250, that’s your limit.
You use and pay for the card just like you would a regular card, but the credit card issuer is not at risk of losing money by issuing the card. This is because if you do not pay off your balance, the lender uses the cash collateral you provided.
“When you’re ready to use credit again after bankruptcy, you need to do it with caution,” says Maliga. “A secure credit card can be a good way to do this. “
But remember: you’re looking to grow your credit profile, so it’s important to make monthly payments on time.
To find a good, secure credit card, make sure it is reported to the major credit bureaus. Also, try to find one with low fees and flexible repayment terms. After a few months, you may be able to switch to a regular credit card with a higher limit.
6. Avoid scams
While there are legitimate companies that can help you rebuild your credit as quickly as possible, there is not much more that you can do for you than you can do on your own. Businesses that charge upfront fees, for example, may try to take advantage of consumers who are desperate to increase their credit rating. If you suspect possible fraud on your accounts, report it to credit bureaus.
The bottom line
Recovering from bankruptcy is very much possible with careful budgeting that tracks your expenses and income. Adopting a few new habits, like living a cash-only lifestyle, can keep you from overspending and getting into trouble again.
Secured credit cards are another tool when looking to rebuild after bankruptcy. These cards, secured by your own cash deposit, prevent you from overspending. But remember, the idea is to focus on rebuilding your credit score through responsible use and consistent payments on time. A secured credit card should not be used to fund impulse purchases.