Restore Your Credit Score After Bankruptcy
The typical Chapter 7 bankruptcy filing will reduce your credit score by 150 to 200 points. By following a few easy steps, you can usually get your score into the mid 600s within 18 months of filing bankruptcy. Within two years, you can be in the high 600s, which is a good credit rating.
If you file bankruptcy while your credit is still solid, your score will bounce back faster. If you instead accumulate delinquencies and collections before filing, your score will take longer to rebound.
The key to rebuilding your credit post-bankruptcy is demonstrating that you can borrow small sums and timely repay them. Obtain a gas card and pay its charges on time, every month.
Sign up for a secured credit card, which means you will only be able to charge what you have prepaid. Use the card a little every month, and pay the bill on time. To find issuers, Google “secured credit card.”
Every month that you record timely credit repayment, your score will improve. In 12 months your credit will be on solid ground, and in 24 months you should have a good score.
Myth: Your Credit Will Never Recover
Most people hear that when the Chapter 7 bankruptcy will stay on their credit report for the next 10 years that no one will ever want to float them a line of credit in that period of time. That’s not true. The further the bankruptcy is in your past, the less of an impact it has on a creditor’s decision. In fact, during that period there are ways of rebuilding your credit after bankruptcy that allow you to have a much higher credit score than you likely do now.
Fact: Your Credit Score Is Already Low
One of the things that most people don’t consider is that’s it’s far easier to rebuild your credit after bankruptcy than it is before. For those who have a number of debts piling up with all of their monthly income already claimed, the bankruptcy is unlikely to affect their credit that much. It will, however, give them the relief they need to start over and begin rebuilding their credit from scratch. If your credit score is already low, then you don’t have a lot to lose by filing for bankruptcy.
Once your bankruptcy has been granted, all of those black marks are replaced with only one, the bankruptcy itself. Now, with less financial obligation and fewer or no debts hanging over your head, you can begin taking real steps to repair your credit whereas before these outstanding accounts would continue to damage whatever positive strides you had already made.
How to Repair Credit Score After Bankruptcy
Once your bankruptcy is completed, your situation is no longer dire, but it isn’t rosy as far as creditors are concerned either. They’re going to want proof that you can pay off your debts and have money left over to take care of your daily needs.
For that reason, creating a budget that is within your means is a good first step. Here, you can plot out your utility expenses, rent or mortgage payments, car loan payments, and whatever else you need on a daily basis to get by. Having an emergency fund that you can pay into every month is a good place to start. This could be a savings account in which you deposit 10% of your check each pay period.
What else can you do to rebuild credit after bankruptcy?
Check your credit score. Your current credit score will be your baseline for moving forward. The bankruptcy will stay on your credit score for the next 10 years and any accounts that were wiped out in Chapter 7 will stay on your account for the next 7 years. There’s nothing you can do about that. What you can do is prove to creditors that you’ve moved forward and are ready to make the necessary changes to your lifestyle to pay back what you borrow.
Assess your options. You will have several options moving forward on the types of lending products you can purchase to rebuild your credit. These include secured loans, secured credit cards, co-signed credit cards, co-signed loans, and authorized user cards. We’ll discuss these in more detail below.
Co-Signed Loans and Credit Cards
Essentially, you are asking a family member with good credit to back you up on a loan or credit card should you fail to make payments. In this case, they will be required by law to pay off any debt you incur if you don’t pay it back yourself. If you think this is a simple thing, think again. Many family members will not be willing to back you up after you’ve declared bankruptcy. There are two good reasons for this. Firstly, you are not responsible for any debt you incur which will feel like more of the same problem after you just filed for bankruptcy. Secondly, there are other ways to accomplish the same goal without putting another individual on the hook for any mistakes you might make.
Secured Credit Cards and Loans
A secured credit card is similar to a regular credit card, but you place a deposit on the card which you can borrow against. The spending limit is equal to your deposit. You can then make strategic purchases with the card and restore the initial deposit on a monthly basis. Secured credit cards can go a long way to help you restore your credit. You will, however, need to maintain a monthly balance in the amount of your deposit and ensure that you can repay the money you “borrow” off the card.
Additionally, some people are rejected for secured credit cards. Getting even a secured line of credit is no easy thing. Also, each time a creditor looks into your credit report it will temporarily drop a small amount. So that’s something to consider before you attempt to apply for a secured credit card.
If you’re rejected, you still have options. You can ask your bank for a secured line of credit and they are much more likely to approve you because you already have a checking account with them. Lastly, credit unions may be willing to offer you a secured line of credit because they are nonprofits and the reason you’re likely to be denied is because you are not profitable to the lender.
Secured loans are another option and they operate much the same way as secured credit cards. You will need to be careful with both as they have very high interest rates and if you’re not, you can find yourself in another debt spiral.
Talk to a Memphis Bankruptcy Attorney
Our Memphis bankruptcy lawyer will assist you with filing bankruptcy and help you get a financial fresh start. Contact The Sweeney Law Firm, P.C. today to learn more about our services.