Improving Credit After Bankruptcy

So you’ve decided to file a bankruptcy petition but are concerned about how it will influence your credit score. Here’s what happens to your credit after bankruptcy, and what you can do about it.

You should also consider what NOT filing will do to your credit.  If you are behind on bills due to divorce, medical catastrophe, or job loss, your credit score has already taken a hit due to delinquent accounts. You might be facing foreclosure or car repossession, and these also affect your credit negatively. It may just be that the credit ramifications of NOT filing bankruptcy are more severe and long-lasting than filing bankruptcy, resolving your financial issues, and getting a fresh start. 

The fact that you filed a personal bankruptcy case can remain on your credit report for up to ten (10) years.  That being said, the type of bankruptcy you filed, why you filed bankruptcy, whether you completed your Chapter 13 plan, and whether you received a discharge will all factor into your credit score, as will your post-bankruptcy financial behavior.

The Effect of Filing Chapter 7 on Your Credit

Again, a Chapter 7 bankruptcy can stay on your credit report for up to ten (10) years. However, if you received a discharge of all unsecured debt, chances are your debt-to-income ratio has improved significantly. This will ultimately improve your credit score within a few months after receiving your discharge.

The Effect of Filing Chapter 13 on Your Credit

A Chapter 13 bankruptcy filing also stays on your credit report for up to ten (10) years. And, your debt-to-income ratio will also improve after your unsecured debt is discharged.

If you’ve paid your monthly Chapter 13 plan payments to the Trustee in full and on time throughout your Chapter 13 case, that responsible behavior will reward you with an account marked “current” on your credit report.  This is a very good thing.  So if you file a Chapter 13 case, be sure to work closely with your attorney to craft a plan that is affordable for you.  If your financial circumstances change in any way while you are in Chapter 13, notify your attorney so any adjustments in plan payment can be made.

Ways to Improve Your Credit After Bankruptcy

1.   Pay all monthly bills in full and on time.

After you receive a discharge and your bankruptcy case closes, be sure to pay your monthly bills in full and on time.  Why? You want the electric, gas, oil, water/sewer, cable, cel phone companies to all report to the credit bureaus that your accounts are current.

This will go a long way to ameliorate the effect of the fact of your bankruptcy filing on your credit score and your credit score will improve given a few months of this behavior. Your current and future responsible financial behavior will eventually ameliorate the negative effect of the bankruptcy on your credit score.

If you demonstrate post-bankruptcy financial responsibility in the months and years following your bankruptcy filing, lenders will also take this into consideration when you apply for a car loan or lease or a mortgage. As a result, lenders will likely offer you better terms and a lower interest rate than they would if they perceived you were still at high risk of default on the loan.

2.   Obtain a secured or low-limit unsecured credit card.

Demonstrating responsible use of credit will also improve your credit score following bankruptcy. Chances are you will receive many credit card offers following your bankruptcy. Collect them and inspect them. Some will be secured cards – meaning, a deposit of $500 or $1000 will be required and you can use the card against that sum. Some will be unsecured cards but will have very high-interest rates.

Either way, it is important to obtain a credit card, use it wisely, and pay it off every month. Consider getting a cash-back card, or a gas card that offers a discount when used to purchase gas or a card that accrues points or airline miles. These will give you something back and also serve as an opportunity to demonstrate responsible management of your finances after bankruptcy.

3.   Take out a car loan.

Lenders will consider you for a car loan following bankruptcy, but will only offer loans at higher interest rates due to your bankruptcy filing.  Do not let this dissuade you from purchasing a car. There are ways to get around a high-interest rate, such as pre-paying a bit of the loan each month.

Getting a new (or new to you) car and making the monthly car payment in full and on time is a powerfully effective way to improve your credit.

Regardless of these tips, it is important to craft an affordable budget for yourself and live within that budget. If you do, you are sure to improve your credit score after bankruptcy drastically after your case closes.

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