While Chapter 7 bankruptcy can give you needed relief from your debts, you may be worried that your credit will never be good again. It is likely that your credit was in bad shape if you were eligible to file for bankruptcy under Chapter 7. The idea that bankruptcy will permanently ruin your finances is a misconception, however. Instead, you have the ability to rebuild your credit after bankruptcy.
Bankruptcies do show on your credit report for 10 years, but the negative impact of filing fades over time. You can hasten that process by adding positive items to your credit report, which will offset the negative information. Here are some ways you can begin rebuilding your credit following a Chapter 7 bankruptcy.
Begin with the basics
After you have been through a bankruptcy, potential creditors will want to see that you have sufficient income to both pay all of your current bills while also having some left over. People with lower debt burdens are more attractive as borrowers. The other caveat is that lenders understand that you will not be able to file for bankruptcy and to receive another discharge for eight years.
You can start by establishing a budget that helps you to stay ahead of your finances. You should have received budgeting information during your pre-discharge credit counseling session. You can also seek help from a nonprofit credit counseling agency for advice on budgeting.
After you have set your budget, you will want to start building your emergency fund. According to the Urban Institute, having just $250 in your savings account can help you to cover unexpected expenses so that you do not begin spiraling new debt out of control.
Plan your strategy for obtaining credit after bankruptcy
It is possible to prove yourself to credit card issuers and other lenders following your bankruptcy. The main problem that you will face is that potential creditors will be able to see your history, so you will need to do additional work in order to build your credit score. You should start by requesting your annual credit reports from all three major bureaus, which are provided for free. If you see incorrect information, dispute it so your reports can be corrected.
Your bankruptcy will stay on your report for 10 years, and other delinquencies will remain there for seven years afterward. While Chapter 7 discharges your debts, it doesn’t clear your credit reports.
The next step is to check what your credit score currently is. You can get a copy of your FICO score from CreditKarma, which provides them to anyone. You should keep track of your credit score as it changes each month, looking at the same type of score each time.
Pick your product
Because of your payment history before your bankruptcy, you will be viewed as a very risky borrower. This means you will likely need to provide additional assurances so the lender knows that loaning money to you won’t result in a loss. Here are four types of assurances you might expect to have to give:
1. Securing your loan
Secured loans are normally offered by community banks or credit unions. One kind involves your securing the loan with money that you have on deposit. While you are repaying your secured loan, you will not be able to use the money that is securing it. Another kind of secured loan involves the institution placing the money in an account for you. The money is only accessible after you have made all of the required payments. The bank or credit union then agrees to report your payment history to the three major credit reporting agencies.
2. Secured credit cards
With secured credit cards, you make a deposit, and the card issuer sets the credit limit at the amount that you deposited. These cards often have high-interest rates and annual fees. You can use them to help build your credit until you are eligible for an unsecured card with better rates and terms. It is possible for a card issuer to reject you for a secured card, so make sure that you will be approved before you submit your application. Every inquiry to your credit can result in a temporary drop in your credit score. This drop will be negated if you are able to get approved for a card, pay your debt on time and do not max it out.
3. Get a cosigner for a loan or credit card
Getting a cosigner can help to improve your credit score, but if you fail to pay or are late with your payments, your actions can harm the credit score of your cosigner. Cosigners are also responsible for the entire debt if you don’t pay what you owe, and because of having more debt, his or her own ability to borrow may be more limited. You’ll need to make sure that you always make your payments on time and as agreed.
4. Become an authorized user
If you do not have someone who can cosign with you, you might instead ask someone if he or she will allow you to be an authorized user on his or her card. Before doing so, you will want to make sure that the credit card issuer will report your payment activity as an authorized user to the credit reporting agencies.
Because authorized users are not ultimately responsible for repaying the debt, becoming one doesn’t increase your score as much as do the other methods. Still, it may help you, so it might be worth pursuing as an option.
After you get credit extended to you
Once you have convinced a lender to loan you money, always make sure that you make your payments on time. For credit cards, keep your balances low and do not max them out. A key is to keep them at least under 30 percent of the limit or even less. Eventually, your credit score will go up as your recent payment history shows that you keep your obligations. This will help you to restore your reputation and move forward with your life.
Contact Our Attorneys
If you believe your financial circumstances warrant filing for bankruptcy, doing so may help you get the financial relief that you need. Contact our bankruptcy lawyers today to learn more about whether bankruptcy is a good option for you.