YES! There is Life After Bankruptcy!
Your ability to reestablish credit after filing bankruptcy is better than it has ever been. Most of my clients are really concerned about how a bankruptcy filing will affect their credit score. Unfortunately, negative but truthful data must stay put on your credit report. A credit report is a history. Under federal law, you are entitled to an accurate history, but not to a re-writing of truthful history. That history can properly include delinquencies or bankruptcy. A bankruptcy discharge will not erase discharged creditors or your pre-bankruptcy payment history. After a bankruptcy discharge, the amount outstanding for each discharged account should be shown as zero.
Nothing in credit is "forever." A bankruptcy can remain on your credit report for up to 7 years (Chapter 13) or 10 years (Chapter 7), but its effect on your credit score can start to diminish the day your case is closed — if you adopt responsible credit habits such as paying your bills on time, using only a small portion of your available credit, and not applying for too much credit at once. After you receive a bankruptcy discharge, you could attempt to live on a cash-only basis, and that may be a smart choice for those who can’t really handle credit. However, the ultimate irony after receiving a discharge of debt in bankruptcy is that, if you want to rebuild your credit score, you have to get and responsibly use credit.
How to Reestablish Credit After Bankruptcy
Here are some tips on responsibly and successfully reestablishing your credit after filing bankruptcy:
- Pay your reaffirmed, pre-bankruptcy debts (such as car loans or mortgages) on time.
- Learn from your mistakes: if overspending was a problem, establish a household budget. If you didn’t have enough savings to survive a job loss, set aside an emergency fund. If you were sunk by medical debts, seek a job with insurance coverage, or check to see if you are eligible for state coverage.
- Open a checking or savings account. Lenders may look at this to determine if you can responsibly handle money.
- Apply for store and gas credit cards for things that you would normally pay for in cash, but use these credit lines wisely and sparingly, and always pay in full and on time.
- Apply for a secured card where you deposit cash and charge against it. Pay advances back over two months so that they will be reflected as positive marks on your credit report.
- Get an installment loan with payments you can afford. If you still have student loans (which typically aren't dischargeable in bankruptcy), you can use them to rebuild your score. Make your payments on time, all the time, and try to pay more than you owe whenever possible. Next to making on-time payments, paying down your existing debt is one of the best ways to improve your credit score.
- Pay your utility bills and rent on time for at least a year.
- Find a friend or relative to co-sign for you on a loan and pay it on time.
- Stay away from payday loans that are at high interest rates and are a “bad credit” trap.
- Live within your means. Do not unnecessarily increase your debt-to-income ratio by taking on credit to purchase luxury items that you do not need. As a general rule, your payments on consumer debt should never exceed more than 20% of your expendable income after costs for housing and a vehicle and contributions to your savings or retirement account.
Borrowing After Bankruptcy — And Avoiding "Credit Clean-Up" Scams
Once your case is discharged, you will receive many solicitations from lenders offering to finance homes, vehicles and credit cards. Choose how much you borrow and who you borrow from very carefully. Don’t fall back into bad habits. You may also receive offers from “credit clean-up” or “credit improvement” companies, but don’t waste your money. A lot of these companies are running scams and you are more than capable of handling an incorrect entry on a credit report. Anything these companies can do you can do better and at no cost.
Thinking About Bankruptcy?
If you live in Northern Utah and are considering bankruptcy, contact the Law Office of Marji Hanson to discuss your debt management options and solutions that will work best for your financial circumstances.