Practical tips for rebuilding credit after bankruptcy

Many people assume that bankruptcy will forever ruin a credit score and make obtaining credit in the future next to impossible. Fortunately, these fears are unfounded. Bankruptcy does have short-term consequences for access to credit, but can actually be much better for a person’s long-term credit rating than defaulting on loans and foreclosure.

That is not to say every bankruptcy filer should rush out and get loans after completing bankruptcy. Often it makes sense to make regular payments and re-establish credit before taking out significant loans when more favorable terms are available.

A good benchmark is a credit score of 650 or above. Once this mark is reached, a person can shop for loans competitively. Immediately after bankruptcy, the filer usually must pay more for credit and higher penalties since creditors consider a recent bankruptcy filer a greater risk.

Credit effect of Chapter 7 bankruptcy

Chapter 7 bankruptcy involves the filer selling off assets in order to pay off creditors. Because any debt that is not payable by the debtor is discharged, with a few exceptions, the bankruptcy filer’s debt-to-income ratio often improves immediately. In addition, Chapter 7 is unavailable for eight years after first filing, meaning creditors can often feel more secure in loaning money right after bankruptcy is complete. However, this also means someone newly free of debt must use caution in order to avoid falling into a debt trap once again.

Chapter 13 bankruptcy

Chapter 13 bankruptcy reorganizes debt into manageable payments for three to five years. At the end of the payment plan, the remaining debt is discharged, again with a few exceptions. Some people who file Chapter 13 do not need to finish the payment plan; in some cases it is possible to refinance as soon as a year or two after filing to pay off the remaining creditors in a Chapter 13.

After sticking to a budget and regularly making payments during a Chapter 13, a debtor is usually better able to manage debt.

Restoring credit

Common sense measures can improve a credit score, such as paying bills on time and not taking out unnecessary credit. It is also important to keep emergency funds in reserve. A good goal is to keep 10 percent of income in savings. In addition, some recent bankruptcy filers are targets for predatory lending practices, so recent filers must be on the lookout for “too good to be true” offers. A debtor may also wish to avoid a credit repair agencies. There is nothing under the law that they can do that a debtor cannot on his or her own. And while bankruptcy does not end the ability to obtain credit, it also will remain on a credit score for several years after filing.

One way that many people restore credit after bankruptcy is through secured credit cards. Secure cards usually give credit between 50 and 100 percent of the debtor’s initial deposit. After a year or two of timely payments, it is likely the creditor will increase the debt limit on the card.

A bankruptcy attorney can help

Debtors unable to manage payments should contact a skilled bankruptcy attorney to discuss their options and if bankruptcy is right for them.