How to Recover From Bankruptcy
When you declare bankruptcy your credit score drops tremendously.
There is no way around it.
That bankruptcy listing on your credit report is devastating because it shows your future lenders that you completely defaulted on your previous loans (or in the case of a chapter 13 that you needed judicial assistance to be able to repay your loans.
) Even though you may be financially free and clear once your bankruptcy is completed, the rebuilding process can take several years.
We've outlined the steps below to help you speed that process up, and qualify for new loans a little faster.
1) Build up your savings account - There is no sense in getting into financial trouble all over again.
Before you apply for any new credit you need to save a minimum of three to six months worth of expenses.
This protects you in case you are laid off from your job, injured, your car breaks down, or any number of other possible catastrophes.
2) Consider applying for secured credit cards - Secured credit cards are simply loans that you have secured with a deposit.
Your credit limit usually matches the amount of the deposit that you give the lending bank.
Now, I know that if you are fresh out of bankruptcy you probably don't have a ton of money floating around to use as a security deposit.
Do not use the money in your savings account to secure your loan.
Credit cards are not backup plans in case of an emergency.
If you think that way, you are going to be right back in financial trouble.
Save the money for your deposit in a separate account.
Why should you consider a secured credit card? Well, when you are fresh out of bankruptcy, there are very few lenders who are willing to give you an unsecured loan.
If you do manage to get approved for one, your interest rate will literally be the highest rate possible.
Secured credit cards typically have much lower interest rates (some even offer zero percent for a number of months).
By securing the loan with your own money the lender knows that if you default, they can simply use the security deposit to pay your balance.
It's a win-win situation.
As you learn to handle your credit after bankruptcy, you may experience some problems.
It's nice to have the safety net of the security deposit to cover you in the event that you cannot pay your bills.
As long as you use your secured card appropriately, your initial deposit will be returned to you in about 18 months.
The last benefit of a secured card is that most lenders report positive payment to all three credit bureaus every single month.
This will help to raise your credit score and help you qualify for better loans in the future.
3) Clean up your credit reports - Sometimes, if you had a lot of accounts listed in your bankruptcy, they don't all get marked that way on your credit reports.
If a new lender views your credit report and it looks like you still owe that money (rather than the record showing that it was included in your bankruptcy and you are no longer liable for the amount) they will refuse to give you a loan.
Visit Annual Credit Report.
com after your bankruptcy is discharged.
This will allow you to get a free copy of your credit report from all three credit bureaus.
Check your information carefully, and make sure that every single account that was included in your bankruptcy shows up that way.
Better yet, check for inaccuracies, and have as many negative accounts removed as possible.
4) Do not apply for unsecured credit for at least 18 months - You need a good strong history of on-time payments and staying under your credit limit before you start applying for unsecured loans.
Let your secured loans work for you during that time, and avoid applying for any other credit.
Not only will it lower your credit score to apply and get rejected, the fact that you applied remains on your credit reports for at least two years, and that doesn't look very good to future lenders either.
5) Keep balances on your credit accounts under thirty percent of your available credit - For example, if you have a credit card with a $300 limit, you should never charge more than $90 on the card in a single month.
This will maximize your credit score, and prove that you are capable of handling your new loan accounts.
6) Keep paying down any accounts that you do still have open - If you were able to keep some loan accounts through your bankruptcy, make certain that you pay them on time each month, and that you get the balance on them down as low as possible.
7) Do use your credit cards - Sometimes people fresh out of bankruptcy swear off loans forever.
That can be smart from a financial standpoint, but bad if you ever do need a loan for some reason.
If you don't use your credit cards each month, then there will be no record of positive payment for your lenders to report.
Again, stay under thirty percent of your credit limit, and pay the balance in full each month.
If you follow these tactics your credit score should recover nicely (at least to the point of being able to qualify for an unsecured loan) within about 18 months.
If you don't follow these tactics, it could be years before you are able to get a loan of any type.
There is no way around it.
That bankruptcy listing on your credit report is devastating because it shows your future lenders that you completely defaulted on your previous loans (or in the case of a chapter 13 that you needed judicial assistance to be able to repay your loans.
) Even though you may be financially free and clear once your bankruptcy is completed, the rebuilding process can take several years.
We've outlined the steps below to help you speed that process up, and qualify for new loans a little faster.
1) Build up your savings account - There is no sense in getting into financial trouble all over again.
Before you apply for any new credit you need to save a minimum of three to six months worth of expenses.
This protects you in case you are laid off from your job, injured, your car breaks down, or any number of other possible catastrophes.
2) Consider applying for secured credit cards - Secured credit cards are simply loans that you have secured with a deposit.
Your credit limit usually matches the amount of the deposit that you give the lending bank.
Now, I know that if you are fresh out of bankruptcy you probably don't have a ton of money floating around to use as a security deposit.
Do not use the money in your savings account to secure your loan.
Credit cards are not backup plans in case of an emergency.
If you think that way, you are going to be right back in financial trouble.
Save the money for your deposit in a separate account.
Why should you consider a secured credit card? Well, when you are fresh out of bankruptcy, there are very few lenders who are willing to give you an unsecured loan.
If you do manage to get approved for one, your interest rate will literally be the highest rate possible.
Secured credit cards typically have much lower interest rates (some even offer zero percent for a number of months).
By securing the loan with your own money the lender knows that if you default, they can simply use the security deposit to pay your balance.
It's a win-win situation.
As you learn to handle your credit after bankruptcy, you may experience some problems.
It's nice to have the safety net of the security deposit to cover you in the event that you cannot pay your bills.
As long as you use your secured card appropriately, your initial deposit will be returned to you in about 18 months.
The last benefit of a secured card is that most lenders report positive payment to all three credit bureaus every single month.
This will help to raise your credit score and help you qualify for better loans in the future.
3) Clean up your credit reports - Sometimes, if you had a lot of accounts listed in your bankruptcy, they don't all get marked that way on your credit reports.
If a new lender views your credit report and it looks like you still owe that money (rather than the record showing that it was included in your bankruptcy and you are no longer liable for the amount) they will refuse to give you a loan.
Visit Annual Credit Report.
com after your bankruptcy is discharged.
This will allow you to get a free copy of your credit report from all three credit bureaus.
Check your information carefully, and make sure that every single account that was included in your bankruptcy shows up that way.
Better yet, check for inaccuracies, and have as many negative accounts removed as possible.
4) Do not apply for unsecured credit for at least 18 months - You need a good strong history of on-time payments and staying under your credit limit before you start applying for unsecured loans.
Let your secured loans work for you during that time, and avoid applying for any other credit.
Not only will it lower your credit score to apply and get rejected, the fact that you applied remains on your credit reports for at least two years, and that doesn't look very good to future lenders either.
5) Keep balances on your credit accounts under thirty percent of your available credit - For example, if you have a credit card with a $300 limit, you should never charge more than $90 on the card in a single month.
This will maximize your credit score, and prove that you are capable of handling your new loan accounts.
6) Keep paying down any accounts that you do still have open - If you were able to keep some loan accounts through your bankruptcy, make certain that you pay them on time each month, and that you get the balance on them down as low as possible.
7) Do use your credit cards - Sometimes people fresh out of bankruptcy swear off loans forever.
That can be smart from a financial standpoint, but bad if you ever do need a loan for some reason.
If you don't use your credit cards each month, then there will be no record of positive payment for your lenders to report.
Again, stay under thirty percent of your credit limit, and pay the balance in full each month.
If you follow these tactics your credit score should recover nicely (at least to the point of being able to qualify for an unsecured loan) within about 18 months.
If you don't follow these tactics, it could be years before you are able to get a loan of any type.