How Do You Start Rebuilding Your Credit After Bankruptcy?

In many cases, the people who need and can benefit the most from filing bankruptcy do not even consider it as an option. There’s an unfortunate stigma against bankruptcy, and many think that it is wrong or harmful. Nothing could be further from the truth. People file for bankruptcy every day. It is a viable way to recover from financial hardships out of your control, such as hospital bills from an unexpected medical emergency, the loss of your job, or a divorce. Another thing that can prevent people from considering bankruptcy is the idea that it can be impossible or extremely difficult to rebuild your credit afterward. This is not true. In fact, rebuilding your credit after bankruptcy is simpler than many people imagine.

Causes of Bankruptcy

Bankruptcy can occur for a variety of reasons. The Huffington Post published an article with US Bankruptcy statistics on the most common causes of bankruptcy. Here are the top reasons for filing bankruptcy according to those statistics:

  • Salary reduction
  • Medical bills
  • Student loan debt
  • Job loss
  • Utility bills
  • Divorce
  • Credit card and personal loan debt
  • Foreclosure
  • Expenses for unexpected emergencies
  • Overspending/poor budgeting

Related: How to Save Money While Going Through a Divorce

Types of Bankruptcy

Bankruptcy generally falls under one of the categories below:

Chapter 7 – Chapter 7 bankruptcy enables people in debt to discharge certain debts they owe and get a fresh start. Debts that are dischargeable under Chapter 7 bankruptcy law include but are not limited to medical bills, credit cards, car accident claims (not those involving drunk driving), student loans, overdue rent and utility payments, and personal loans.

Chapter 11 – Chapter 11 bankruptcy allows businesses to reorganize their debt to help them be able to afford to pay back their creditors. During Chapter 11 bankruptcy, the business continues to operate. However, the bankruptcy court will have control of any major decisions regarding the business during the bankruptcy process. If a Chapter 11 reorganization does not work, the case is generally either dismissed or the business is liquidated via a Chapter 7 bankruptcy.

Chapter 13 – Chapter 13 bankruptcy enables people to seek debt relief while protecting valuable assets. People who file Chapter 13 are usually high-income earners and/or have valuable property and other high-priced items they do not want liquidated as part of a bankruptcy.

Chapter 13 gives people the opportunity to have debt relief and pay off their creditors. Under Chapter 13, people agree to an affordable repayment plan that allows them to repay their creditors over three to five years.

Related: What’s The Difference Between Chapter 7 and Chapter 13 Bankruptcy?

Should I File for Bankruptcy?

Filing for bankruptcy is a huge decision that should not be made lightly. However, in many situations, it is the best option for people and their families or businesses to realistically regain control of their finances. Before you decide to file bankruptcy, you should research bankruptcy as well as alternatives to bankruptcy. In addition, you should talk to an experienced bankruptcy lawyer about your situation. Once you have all this information, you can make an informed decision regarding your financial future.

Is Rebuilding Your Credit Possible Following Bankruptcy?

Rebuilding your credit is possible in the wake of any type of bankruptcy. In fact, it is often easier than people imagine. The reason why is that bankruptcy gives you a fresh start financially, which enables you to rebuild your credit the right way and often much more quickly than you would imagine you could.

What Do I Need to Do to Rebuild My Credit After Bankruptcy?

In the wake of a bankruptcy, lenders will be open to giving you credit, because your debt load will be lighter, and you will not be able to file for bankruptcy again for 7 to 10 years. Here are a few tips for people who filed bankruptcy to follow to get their finances back on track:

  • Budget – You must begin budgeting properly. The credit counseling you went through before filing for bankruptcy should help you do this. You can also seek budgeting help from a credit counseling agency. There are nonprofit credit counseling services that can help you with the basics.
  • Emergency Fund – After coming up with a budget, you will want to begin saving up for emergencies. Ideally, you want at least $1,000 saved up in case of a health emergency, a vehicle repair issue, or some other type of unexpected expense. However, having even as little as $250 saved could end up helping you avoid turning to payday loans or credit cards to handle an emergency.
  • Credit Reports – Secure copies of your credit reports. Having those will enable you to know what you owe so you can begin planning a way to pay off your remaining debts. Also, having access to your credit reports allows you to discover any inaccuracies on your report. If you find inaccuracies on your report that are hurting your credit score, dispute them. If you dispute mistakes on your credit report, you can often have them removed, which will improve your credit score.
  • Credit Scores – Keep an eye on your credit scores from TransUnion, Experian, and Equifax. In particular, many lenders and banks consider your FICO credit score when deciding whether to extend credit you or not.
  • Secured Loans and Credit Cards – Apply for a secured loan or secured credit card. Unlike unsecured credit cards and loans, the money used to back secured loans and credit cards is provided by money you deposit. Secured loans and credit cards report to the credit bureaus, so they enable you to rebuild your credit by showing you can use your credit responsibly, including paying your bills on time and keeping your balances low.
  • Use Credit Responsibly – Pay your bills on time or early. Keep balances on your credit cards but keep the balances low. A good credit card balance is 30 percent of your credit limit. A great credit card balance is 10 percent of your limit. Over time, if you use your credit responsibly, you will be trusted with better credit card, loan, and mortgage options.

Talk to a Bankruptcy Attorney About Your Situation

If you are in trouble financially, the best thing you can do, whether you are considering bankruptcy or not, is discuss your situation with an experienced bankruptcy lawyer. Most bankruptcy attorneys will talk to you about your situation for free. Therefore, you have nothing to lose and everything to gain. You can ask the bankruptcy lawyer questions, have the attorney review your case, and have the lawyer tell you whether bankruptcy is the right option for you and why. In addition, an attorney will be able to explain what other options you have besides bankruptcy.

Related: Frequently Asked Questions About Bankruptcy