Rebuilding Your Credit After Bankruptcy

By: Frank Bruno

In the past, filing bankruptcy was like having a Scarlet Letter on your chest. Bankruptcy made people outcasts and pariahs. It was as if a contagious disease struck, and no one wanted to be near you for fear of infection. 

Today, bankruptcy doesn’t quite have the stigma it used to. Many of the world’s most successful people have filed for bankruptcy. These people hit rock bottom, and have bounced back to become wildly successful.  

To emerge from bankruptcy requires diligence and discipline. In order to get back on your financial feet, you must rebuild your credit. 

If you filed a chapter 13 bankruptcy, you had to make your court-ordered payments until the bankruptcy was satisfied. Even though you made great strides financially by doing so, lenders don’t see it quite that way. Lenders don’t consider your bankruptcy payments as a way to rebuild your credit. In fact, the “rebuilding credit" clock starts after it’s discharged, no matter how long it takes you to pay while in chapter 13. 

If you filed a chapter 7 bankruptcy, rebuilding won’t take quite as long. When you file for chapter 7 bankruptcy, your debts are essentially wiped out, and you start all over. Once your chapter 7 is discharged, which usually takes a few months from when you filed, your rebuilding credit clock starts. 

When you file for chapter 7 bankruptcy, you have the choice of reaffirming some of your debt. In other words, you can choose to keep some of your credit lines open instead of having them wiped out.

This is an option you might want to consider, especially if you have smaller credit cards with low balances (under $500). By continuing to pay your reaffirmed debt, you can help rebuild your credit with timely payments and low balances. 

Regardless of which bankruptcy you file, there will come a time when the bankruptcy is fully discharged. It’s almost like being free after years in prison – you made some mistakes, you paid for them, you (hopefully) learned your lesson, and you’re looking to make a fresh start. Now, you have to rebuild your credit. 

Paradoxically, you need to obtain credit to rebuild credit, but you can’t obtain credit if you just invalidated your creditors. One of the best and most popular ways to begin the process is to obtain a secured credit card. With a secured credit card, a credit company will extend you a credit line in exchange for a cash deposit. Your credit limit is usually equal to, or a percentage of, your deposit. Rarely, if ever, will it be higher than your deposit.

These credit cards are not hard to find. In fact, since bankruptcy is public record, many of these companies will find your name at the county courthouse and send you a solicitation to apply. You must be careful when dealing with these companies. Some are notorious for “kicking you when you’re down." In addition to the deposit, they will charge you exorbitant junk fees and interest rates. Always read the fine print in the solicitation. As required by law, they must disclose their fees and rates to you. 

As well, make absolutely sure that the credit card company actually reports your payment history to the three major credit bureaus. Getting a secured credit card is worthless if your history isn’t reported. It’s worth repeating that you must find out if they report to all three bureaus, as opposed to just one or two. You will handicap your rebuilding efforts if the history does not show up on all three. 

Lastly, make sure the credit card is an actual Visa or MasterCard. Some credit companies offer credit cards that are only usable on their own products. They look like real credit cards, but if they’re not Visa or MasterCard, you can’t use them anywhere of consequence. 

Once you have discharged your bankruptcy, obtain a copy of your credit report from the three major bureaus. In order to start your rebuilding credit campaign, you must know where you stand. Filing bankruptcy will have a tremendous impact on your credit scores. When you know where your score stands, you can take the necessary steps to boost them in the shortest possible amount of time.

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