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Bankruptcy can be painful, embarrassing and devastating to your credit standing, but its promise of a "fresh start" is very real. And if you have a solid game plan, you can do much to recover from bankruptcy and restore your credit within a few years of filing.
Before we look at practical steps for speedy bankruptcy recovery, let's consider the damage you'll be trying to undo.
A bankruptcy causes a severe drop in your credit scores, and it persists as a negative entry in your credit file for many years. How long and exactly how much of a score drop depends on what your score was before filing, on the status of your existing credit accounts, and on the type of bankruptcy you file. A Chapter 7 bankruptcy, which wipes out all your debts, has the deepest impact on your credit scores and stays on your credit report for 10 years. A Chapter 13 bankruptcy, which restructures your debts so you pay off a portion of them in three to five years, remains on your credit report for up to seven years and is less harmful to your credit scores than Chapter 7.
Here are some important steps to begin rebuilding your credit after bankruptcy.
Check Your Credit Reports
Begin your recovery plan with a clear understanding of where your credit stands. Do this by checking your credit reports, reviewing them for accuracy, and disputing any entries that need correction. This process will be slightly different depending on which type of bankruptcy you file.
Checking Your Credit Reports After Chapter 7
If you filed Chapter 7 bankruptcy, wait until your case is discharged—you'll receive a letter from the court informing you when that's done, usually no more than six months after your court filing. Wait 90 to 120 days after receiving the letter so your credit reports have time to update with the bankruptcy information, and then request your credit reports from all three national credit bureaus (Experian, Equifax and TransUnion). You can get a free Experian credit report every 30 days. You are also entitled to one free report a year from each of the three credit bureaus at AnnualCreditReport.com.
Review your reports carefully for accuracy and dispute any entries that need correction, taking care to note that:
- All credit accounts covered under the bankruptcy are labeled "discharged in bankruptcy" (not "charged off") and list outstanding balances of zero dollars.
- If any debts were excluded from the bankruptcy filing, such as a mortgage, make sure they are not listed as discharged, and that payments are being reported.
Checking Your Credit Reports After Chapter 13
If you filed Chapter 13 bankruptcy, your case won't be discharged until the end of your three-to-five-year repayment period, so you can just wait 90 to 120 days after your bankruptcy filing to request your credit reports.
The status of accounts included in your Chapter 13 repayment plan may or may not be reflected in your credit report: Creditors are not obligated to report payments received during the Chapter 13 repayment period, but some do.
- Check to make sure payments to any accounts excluded from the bankruptcy settlement are being captured.
- Once your repayment period ends—two and a half to five years after you file Chapter 13, depending on the terms of your repayment plan—you'll receive a notice that your case has been discharged. Wait about 120 days and then check all your credit reports. Make sure all loans settled under the repayment plan are closed and list zero balances.
Check Your Credit Scores
If you haven't done so already, sign up for a service, such as the one from Experian, that lets you check your credit scores for free. Your scores may not paint a pretty picture, but depending on how recently you filed your bankruptcy plan, they may not yet be at their lowest point: Your scores will decline significantly when you file bankruptcy, and if you file Chapter 7, they may dip further once the court has discharged your case—a process that can take several months (and which may not be reflected in your credit file for several weeks after that). A Chapter 13 bankruptcy isn't considered discharged until the end of the court-approved repayment period.
If overdue or defaulted credit accounts significantly hurt your credit scores before you turned to bankruptcy—a situation common to many filers—you may find that filing for bankruptcy has less impact on your scores than you might have imagined, if only because your scores had already fallen about as far as they could. Some individuals with heavily damaged scores even see small score increases after filing Chapter 13 bankruptcy—but their scores are still likely to be in poor territory. That can be a hard fact to face, but facing it is exactly how to begin your credit recovery plan.
Avoid Repeating Past Mistakes—and Making New Ones
You can make your bankruptcy a learning experience by reviewing your past missteps and taking care not to repeat them. Re-examine your old patterns of spending, borrowing and repayment (or lack thereof) to better understand exactly what led you to bankruptcy, and take steps to ensure you won't go down those paths again.
Consider working with a certified credit counselor to devise a realistic budget, set achievable money management goals, and establish a long-term plan for rebuilding your credit.
Beware credit repair companies that promise to help re-establish your credit in short order, or clean up your credit report quickly. There are no quick fixes for bankruptcy. Rebuilding your credit after you've filed for bankruptcy takes time and patience. Millions have done it, and you can too.
Work on Rebuilding Your Credit
Once you have a solid sense of your credit picture, plan to monitor your credit scores monthly and check your credit reports annually. You can then take steps to begin building up your credit. Start by reviewing the factors that determine your credit scores, and habits that help them improve, and then consider these tried-and-true tactics:
- Take out a credit-builder loan at your local credit union. As the name implies, these loans are designed to help people establish or rebuild credit. The amount you borrow—typically no more than $1,000—is placed in a special savings account, where it earns interest but is inaccessible to you until the loan is paid in full. You make a fixed payment (with interest) each month for a set period ranging from six to 24 months, after which the funds are yours. (Some credit unions also let you keep some or all of your interest payments.)
As long as you pay on time every month—and after a bankruptcy you should vow never to make a late payment again—your payments will appear as positive entries on your credit report and will tend to increase your credit score. To get the maximum benefit to your payment history, consider asking for the longest-available repayment period. That'll add to the total interest you'll pay, but if you're keeping the interest payments anyway, that just means you'll save a little extra.
- Get a secured credit card. Another product popular at credit unions, but also offered by some banks and other institutions, secured credit cards do not require traditional credit checks. To get one, you must put down a cash deposit, and that sum typically becomes your borrowing limit. If you fail to pay your bills, the lender can take the deposit. If you use the card sparingly, but use it every month and always pay off your balance in full, you'll establish an additional pattern of positive payments on your credit report. A good trick for making this work is to use the card for a payment that recurs every month—such as a phone bill, gym membership and the like, and then set up an automatic payment to the card account through your checking account.
- Consider credit card offers. After you've logged a year or two of positive payments via a credit-builder loan, a secured credit card or both, start watching your inbox and mailbox for credit card offers. The pickings may be slim: borrowing limits low, interest rates relatively high and fees less than ideal. But if you apply for and get a card, you can begin proving you can handle mainstream credit. As with a secured card, use your new card sparingly but regularly, to create a pattern of on-time payments.
There Is Life After Bankruptcy
If you follow these steps, and take care to avoid repeating past missteps, you'll find that your credit scores will begin improving within a few years after your bankruptcy filing. And by the time the bankruptcy "falls off" your credit report after seven or 10 years (you don't need to do anything to remove it), you may find yourself eligible for a wide range of credit, at reasonable rates.