By: Salvador Gutierrez, Associate attorney
Rebuilding credit after bankruptcy may seem like a long, tough road, but it is not as difficult as you might think. A bankruptcy will not completely destroy your finances. Instead, it can give you a financial fresh start, allowing you to build a better future. If you are in the middle of or just coming out of bankruptcy, you know how overwhelming debt, credit and other financial matters can be. Do not stress. Filing for bankruptcy can affect your credit, however, you can improve it if you are careful. Keep in mind that not all credit rebuilding strategies are the same. It depends on a lot your financial situation, your current credit score, your goals, etc.
A bankruptcy can stay on your credit report for up to 10 years depending on the type of bankruptcy you file. There is a good chance your credit score might be lower than you would like until your bankruptcy is discharged. The filing will completely remove the negative comments and late payment notices of the discharged debts. Those debts will be marked as settled.
There are a few general steps you can take to get your score back in shape:
1. Get a Secured Credit Card
The simplest way to start rebuilding credit after bankruptcy is to acquire a secured credit card. You should start getting credit cards shortly after discharge. A secured card is one with a low limit, upon which you place a cash deposit. Typically, this will be equal to your credit line, though your credit line may be slightly higher, depending on the size of your deposit.
Next, make small, strategic purchases on the new card and pay them off as soon as possible. Never exceed 30% of your credit line; anything higher will worry your creditors. For example, if you have a $500 credit line never make over $150 worth of purchases monthly.
2. Get a Loan
This will diversify your credit portfolio and is a good way to boost your credit score if you are careful. The reporting agencies prefer a mix of debt types. If you retained your home and mortgage after the bankruptcy, this will help diversify your debt. Since they do not want
to see just credit cards, an additional small loan will also look help.
If you can get a small loan, do so. Use it for home repairs or something equally valuable. Make sure it is small and secured and pay at least the minimum payment due each month or more if there is no early repayment penalty. The bigger the loan, the more dangerous, of course; but you may need to take out a bigger loan to buy an inexpensive car, for example. If so, do it; but realize you may have to pay a higher rate to a lender willing to work with high-risk borrowers.
3. Watch Your Credit
Check your credit report to see how you are doing and to make sure it is accurate. You can check your report for free on AnnualCreditReport.com. Your credit score is calculated using
information in your credit report, so any inaccurate negative information can make it harder to dig out of debt. If you find mistakes, dispute the errors and get them corrected.
Of course, there will be negative information that is accurate. Bankruptcy wipes out the debt, but it does not wipe your credit reports clean. Your reports will show a Chapter 7 bankruptcy for 10 years, or a Chapter 13 for 7 years. Late payments and debts that go to collection also remain on the reports until seven years after the delinquencies. You will just have to wait for that information to age off your report.
4. Do Not Repeat Past Mistakes
You might think that filing for bankruptcy equals a clean financial slate, but this isn't exactly true. Learn from the mistakes. If you do not, you will not be any better off in the long run. Take an honest look at your spending habits and budget and figure out where you need to cut back or exercise more self-control.
Recovery May Be Faster Than You Think. Although bankruptcy will stay on your record for 7-10 years, you may recover from bankruptcy faster if you follow the above suggestions and
carefully rebuild and monitor your credit. At some point, you may find it easier to take out loans and get other credit cards without secured lines, though of course you should still take great care with them.
Remember, you can only file a Chapter 7 bankruptcy every 8 years, and ideally, you don't want to do it again. Rebuilding credit after bankruptcy is hard enough to do once. When you get to where you'd like to be, take another long look at your credit report and make sure everything is as it should be, with all the discharged debts marked as settled, and all payments on time and
If you are contemplating filing for bankruptcy and worried about rebuilding your credit afterward, call CTM Legal Group today at (312) 818-6700, so we can help walk you through the process.
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