Rebuilding Credit After Bankruptcy
Often times, our clients want to know how to rebuild credit after filing for bankruptcy. In our experiences, lending professionals don’t encounter that many bankruptcies where people have rebuilt their credit. Of the credit reports pulled where there was a history of bankruptcy, however, some of them had a credit score back in the 700’s after filing bankruptcy. The reason rebuilding credit is possible for some people usually reflects that they’ve learned from their mistakes and have established a proven track record of debt management after filing bankruptcy. The fact is, you can rebuild your credit after filing bankruptcy.
Even after bankruptcy, people usually are going to have access to some ability to rebuild their credit. Maybe there is a local business that would help people rebuild credit by offering favorable terms on small purchases. There’s usually an option for a secured credit card that lowers the risks of default and might be available. The key to success is re-establishing credit and demonstrating good financial habits post-bankruptcy.
Some people have said that once they know a bankruptcy has been sought, creditors might still be willing to extent debt knowing you’ll be unable to file for bankruptcy for many years thereafter. This isn’t true for everybody but, at the end of the day, it is possible to obtain debt after a bankruptcy so you can rebuild your credit.
Implicit in someone who has rebuilt credit after bankruptcy is an assumption that they’ve changed the way they manage debts and has demonstrated those habits with a range of debts post-bankruptcy that have been satisfied. All in all, it is certainly possible to rebuild your credit after bankruptcy. The major factor in our experience, however, is that you must change your lifestyle and your choices. We’ll cover some of the ways you can rebuild your credit and also the mindset required for success. Paramount to success is not doing what put you in debt the first time and exhibiting strong financial responsibility. As you incrementally prove you are going to be a responsible borrower, your score ultimately will rebuild. Here’s a few ways to try to get started if you’re rebuilding your credit after filing bankruptcy.
Secured Credit Cards/Store Cards
A secured credit card is a credit card where you put up cash as collateral for the card and if you default again, they will have what is called a secured or priority interest. These types of card can be you’re re-entry point onto the path of rebuilding credit. Secured credit cards are usually available to debtors with bad credit or a bankruptcy. Creditors may feel a bit more at ease issuing this type of credit card to someone with a history of bankruptcy because its going to be secured by collateral and they will have relatively strong rights in that collateral in most cases.
For people who have filed bankruptcy, secured credit cards are a great way to get a credit card quickly and to start re-establishing credit. Don’t worry if the terms of these cards aren’t the greatest. Some might have annual fees, high interest rates or other unfavorable terms. If a secured credit card is your only option at rebuilding your credit after bankruptcy, we recommend you open an account. Here’s the key. You must use the card and pay the statement off every single month. Once you’ve done this for a while, you will have a demonstrative track record that you are managing your credit responsibly. This track record is often going to quickly open the doors for more favorable credit card terms. As you qualify for better credit cards (“better” means no fees).
At the end of the day, you should really be too afraid of the higher interest rates because you will not be able to successful rebuild your credit if you carry balances and allow them to accrue interest. It is extremely important that if you use credit cards, you do not carry balances and end up further in debt even after your bankruptcy). After you’ve started rebuilding, you can consider cancelling the older cards that charge fees (canceling cards can hit your credit score but it usually recovers quickly).
Small Store Financing
This is a less common but still possible way to rebuild credit after bankruptcy. Some small business owners or retailers will offer financing on purchases at their store and you may be able to qualify for it. You can search around or ask local retailers if they offer this arrangement but make sure they will report your payments to the credit bureuas. You can even try to seek out cards issued by more established retailers. They may be more willing to consider your financing if you have a secured card history built up. Ultimately, after you’ve paid any cards you have and successfully complete financed purchases, you should be on your way to rebuilding credit.
Utility Bills and Other Payments
One thing worth noting here is to make sure you avoid any arrearages on utility bills or other service providers that may place your account into collections. These types of collection actions can devastate your credit even further and make it very difficult to rebuild your credit after bankruptcy. Stay on top of any outstanding bills from service providers or you could get derailed.
Mindset for Success
As we’ve explained above, there are many ways that you can start rebuilding your credit after bankruptcy but they all involve one key assumption. You must have the right credit management if you are going to attempt to rebuild your credit. You can’t spend outside of your means using credit and risk building up an insurmountable amount of debt. Remember, there are substantial lengths of time before you can file bankruptcy again if you’ve already filed.
Of course, for most, that is also the hardest part and the reason it takes so long to rebuild credit. They either become fearful of the damage credit accounts can do that they don’t open them again (which is a mistake for rebuilding credit), or they simply are incapable of correctly managing a credit account and once again barely tread water. You have to get back in and show that you can successfully pay back your creditors. Bankruptcy is your chance to do what it takes to change how you handle money. Before, maybe you spent way too much and saved nothing. Now, you’re going to have to learn how to budget, save and be disciplined in your financial life. Here are some tips:
After bankruptcy, save enough in the bank to live six months to one full year without income. Save even more if you can. If you use credit cards, pay them off every month. Make sure you track financial transactions, what that comes in and what goes out. Look constantly for ways to save money, cut expenses or earn more. You’ll be much more likely to succeed if you learn financial management skills and ensure you do not even come close to bankruptcy ever again.
Chris Sawan is both a licensed attorney and a CPA which allows him to provide exceptional service to bankruptcy clients in Toledo, Ohio.
Dennis Sawan is a licensed attorney with a robust background interfacing with Courts making him a valuable asset for bankruptcy clients in Toledo, Ohio.
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