Rebuilding Credit After Bankruptcy | The bank rate

If you’ve recently filed for bankruptcy, you’ll likely be faced with higher rates on loans and credit cards due to a risky credit rating. However, while it will be difficult to improve your credit score at first, it is never too early to start rebuilding your credit.

Here are some basic rules for building credit after bankruptcy:

How to rebuild your credit after bankruptcy

If you are currently bankrupt or have recently filed for bankruptcy, there are a few things to keep in mind when rebuilding your credit.

Don’t try to borrow money too quickly

Instead of trying to get funds right away, focus on making timely payments on existing loans or credit cards each month to help rebuild your credit. Payment history represents 35% of your FICO score, so on-time payments are one of the best ways to build your credit.

Applying for new loans or new credit cards will also trigger extensive inquiries on your credit report, which can lower your score even further.

Why this is important: Every credit check or denial on your credit report can negatively impact your credit score, making it even more difficult to rebuild your credit after bankruptcy.

How to start: Work on making timely payments to your existing accounts to boost your credit score before asking for new funds.

Create an emergency fund

Since a large portion of your debt will likely be wiped out as a result of bankruptcy, now is a great time to start building your savings. By putting a portion of your income in a savings account or reducing subscription services or non-essential memberships, you avoid having to apply for loans, which could put you back in debt if you are not able. keep up with the high interest rates that come with bad credit.

Why this is important: Without an emergency reserve, it can be easy to fall into the same debt traps that caused bankruptcy.

How to start: Once your debt payments have been removed as part of the bankruptcy process, be sure to create a budget based on your income and remaining expenses. Include the construction of a emergency fund under your new budget.

Keep a close eye on your credit reports and credit scores

Each year, you are entitled to a free copy of your credit report from each of the three major credit reporting institutions: Equifax, Experian, and TransUnion. Take advantage of this and regularly review your reports for errors or missing information. If you find any inaccuracies, such as an overdue account that does not belong to you, you can report it to the appropriate credit reporting agency. When the negative rating is removed, your credit score will likely increase.

Why this is important: Inaccurate information on your credit reports can result in a low credit score.

How to start: Use for free access to each of your credit reports. Until April 2021, you can access each of your reports once a week. Many credit card companies also provide you with regular credit score updates to monitor.

Think twice before working with credit repair agencies

Instead of paying a credit repair agency, consider using that money to boost your emergency fund and savings. Focus your efforts on the habits and circumstances that led to your bankruptcy and how you can change them.

“There are a lot of unscrupulous agencies out there that will claim they can remove a bankruptcy or correct a credit report,” says Samah Haggag, senior marketing manager at Experian. “There is nothing a credit repair agency can do that you cannot do on your own. “

Why this is important: Credit repair agencies take the heavy lifting on building credit, but they charge a fee. If you’re prepared to check your credit reports and dispute any errors, you can save that money and use it to continue paying off your existing debt.

How to start: Take a look at your budget and request copies of your credit report yourself before turning to credit repair agencies.

Factors to consider

How Long Does It Take To Rebuild Credit After Chapter 7?

Bankruptcy stays on your credit report for 10 years. However, former bankruptcy lawyer Kevin Chern says that when a person files a Chapter 7 liquidation bankruptcy, the debtor immediately and significantly reduces their debt-to-income ratio, which could pave the way for an increase in the credit rating of credit a year or two later.

“You’re also eliminating your ability to qualify for Chapter 7 for another eight years,” he says. “In the eyes of a potential lender, you may actually immediately appear as a better risk. “

How Long Does It Take To Rebuild Credit After Chapter 13?

Chern also says most Chapter 13 petitioners will see a reduction in the debt-to-income ratio, but it won’t happen as quickly.

“After three to five years of living on a tight budget, Chapter 13 debtors should be much better equipped to manage their money effectively,” he says. “In many cases, after 18 months of regular Chapter 13 payments, a debtor can refinance from a Chapter 13, especially if they have equity in a home.”

Can you get credit after bankruptcy?

While it can be more difficult to find a lender who is willing to offer you a competitive product, there are always ways to get credit after bankruptcy. Here are some types of credit you may receive:

  • Secured credit card. You will make a deposit to a secure account and receive a credit card with a line of credit representing 50-100% of that deposit. Be sure to check the fees and confirm that the bank reports your credit card limit to the major credit card bureaus, offers periodic credit increases, and does not declare the card secure.
  • Automobile financing. Chern says it’s possible for a Chapter 7 debtor to finance a car the day after filing. In addition, “a Chapter 13 debtor may be able to finance a car while the repayment plan is still in effect, although the authorization of the trustee is required after demonstrating that the car is needed to complete repayment of the car. debt.
  • Conventional mortgage. Most experts say it will take 18 to 24 months before a consumer with restored good credit can get a mortgage after release from personal bankruptcy. Borrowers with compromised credit should be prepared to pay interest rates 2-3 points higher than conventional rates.
  • Mortgage loan insured by the FHA. Chapter 13 depositors can get an FHA insured mortgage if they have made timely payments for one year and the debtor has received court clearance. Debtors with a Chapter 7 bankruptcy discharge must wait at least two years after discharge and establish a good credit history.

Next steps

Bankruptcy is a painful process, but when used responsibly, it can help you get a fresh start. When rebuilding your credit after bankruptcy, create a new budget with your updated income and expenses, start an emergency fund, and avoid applying for new loans or new credit cards unless absolutely necessary. Most importantly, keep an eye on your credit reports and credit scores to make sure your efforts are paying off.

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