Declaring bankruptcy is not fun. It’s one of those things all reasonable adults dread and hope they never have to experience. The reality, however, is that every day smart, capable, and yes, even successful people declare bankruptcy. A quick look at the statistics tells the story: according to the American Bankruptcy Institute, over 750,000 people declared personal bankruptcy in 2019. You are not alone.
But just because your situation is not entirely unique does not mean it is not stressful. Indeed, if you have recently declared bankruptcy, this could be one of the most stressful times of your life. Thinking of it as a failure, though, (or even worse, thinking of yourself as a failure) will not help you rebuild any faster. The best attitude to take towards the process of bankruptcy is to think of it as a fresh start. Because that’s exactly what it is. You’ll be wiping the slate clean (financially speaking) in order to get ready for the next chapter of your life, one that is debt and worry-free. You can come back from this. Millions have done it before, and so can you.
While there are many aspects to recovering from bankruptcy here are the most common challenges and opportunities for most people coming out of the bankruptcy process.
1. Check Your Credit Reports
Once you declare bankruptcy and file with the court, your credit will take a significant hit. As painful as it may be, thoroughly checking your credit reports after the dust has settled is the first step you’ll need to take in order to recover and get your credit back in good standing.
If you filed for Chapter 7 bankruptcy, wait until your case has been discharged (you’ll receive a letter from the court), then wait for another 90 to 120 from that date until checking your credit score. This will give the different offices and credit bureaus time to update your score with the latest information.
If you filed for Chapter 13 bankruptcy, your case won’t be discharged until you’ve completed the three to five year repayment plan, so you only need to wait 90 to 120 after the initial bankruptcy filing to get an accurate report of your credit.
You are only entitled to one free credit check from the three national credit report bureaus (Experian, Equifax, and TransUnion) per year, so it is important that you wait until everything has been processed before checking your new score. You can get your free credit reports at AnnualCreditReport.com.
The purpose of checking your credit reports is to verify the information on it is correct and that it reflects that you’ve declared bankruptcy and have been discharged from your debts. Though your free credit report from AnnualCreditReport.com will show you just about everything, it won’t tell you your official credit score… which brings us to step number two.
2. Check Your Credit Score
In short, a credit report is simply your history of paying debt and bills. Your credit score, on the other hand, is a number calculated by lenders to determine your credit risk, and determine how much money they are willing to give you. Your free annual credit report does not contain your credit score, but your credit card company may offer it to you for free (we’ll discuss getting a credit card after bankruptcy below). If not, you can buy a credit score from a number of online resources.
Again, this number is important to know once the dust settles so you can be on firm financial footing and be sure of what your next moves will be. Banks and lenders will use this number going forward to decide whether or not to give you credit, so knowing this number is crucial to your financial recovery. Following a bankruptcy, don’t be surprised to see that your credit score has dropped dramatically. It’s a hard number to look at, but it’s necessary to face that tough reality before you can begin rebuilding a better future. This post-bankruptcy credit score will give you a starting point for the work that is to come.
In fact, it’s a good idea to get into the habit now of reviewing your free credit report annually (or even more often with a paid service) and your credit score monthly. Not only will this give you a current and secure understanding of your financial situation, but when you start to build your credit up and your score improves, it’s proof positive that you’re making progress. And a positive mental attitude throughout this process is almost as good as money in the bank.
After you have received your credit reports, review them carefully for any errors. Your credit score is calculated based on information from your credit report and any errors may have a negative impact due to no fault of your own. If you do see an error, contact the credit bureau immediately to get the issue resolved.
3. Rebuild Your Credit Fast at Credit Unions
Once you have your new credit reports and score, you will no doubt want to begin improving them immediately. One of the first steps to take when rebuilding your credit is to take out a credit-builder loan at your local credit union. As the name suggests, these loans are designed specifically for people who need to establish or rebuild their credit. How they work is simple: the amount you borrow is put into a special savings account that you are unable to access until you’ve paid off the amount of the loan. You make a fixed monthly payment and when it’s paid in full, the funds are released to you…with interest (remember, the money was placed in a savings account). Some credit unions will even refund the interest you paid on the monthly payments, so be sure to inquire about the details. It’s worth shopping around your area to find the best deal for you.
The amount of this credit-builder loan usually will not exceed $1,000 and can be arranged to be paid off over a six- to 24-month period. This will allow you to structure your payments in a way that can be comfortably met every month. And so long as you pay on time, it will appear as a positive entry on your credit reports and improve your overall financial health.
Another product offered by credit unions that is indispensable to rebuilding your credit is a secured credit card. How it differs from a traditional credit card is that you must first put a down payment or security deposit before opening the card. This amount usually becomes your borrowing limit. Again, as long as you use the card sparingly and make each payment on time, it will begin to appear as positive entries on your credit.
A great way to leverage your secured credit card is to use it only for recurring monthly payments, such as a phone bill or gym membership, and link it with your checking account for monthly auto-pay. This way you won’t be tempted to use it for purchases, and it will still be active and helping to rebuild your credit.
When checking your monthly credit score and annual credit report, make sure that the payments you’re making on your new lines of credit are showing up. Mistakes are made by the credit bureaus every day and you want to be sure your hard work and financial diligence are being rewarded. If there’s an issue, contact your credit union and make sure they’re reporting your payments to the bureaus correctly and promptly. Your financial future depends on those numbers.
After a year or so of making monthly payments, you will start to see an improvement in both your credit reports and your credit score. Before applying for an unsecured, mainstream credit card or loan, however, keep in mind that each credit application prompts a “hard inquiry” into your credit history. Too many of these inquiries in a short period of time will actually hurt your credit score, as this type of behavior is considered risky by most lenders. Always be aware of your credit score as well as the financial institution’s standards and requirements before applying for a new credit card.
4. Choose the Right Credit Card After Bankruptcy
Not all credit cards are created equal, especially when it comes to how they treat people who are rebuilding their credit after a bankruptcy. Some banks require an annual fee to keep the card open (some as high as $99/year), while others don’t ask for a cent; some banks offer point rewards that can be redeemed for eligible expenses (such as gas, groceries, etc.), and others offer none. Be sure to research and choose the card that works best for your needs and circumstances. This article on how to get a credit card after bankruptcy can help.
A few of the best banks to check out when you’re looking for a secured credit card are Capital One, USAA, and OpenSky. They all require a security deposit when you first open the card, but the benefits they offer can differ widely. The best credit cards after bankruptcy will report your on-time payments to all three credit reporting agencies. It all comes down to your specific needs and wants. For instance, if you travel frequently for work, you may want to go with a card that offers extended auto rental insurance even if it requires a higher annual fee. If you work from home and will only use the card to pay your phone bill, it may make more sense to go with a card with no annual fee and no perks. Again, it’s all about what works best for you.
If you’re having trouble getting approved for a credit card or loan, think about asking someone to cosign for you or become an authorized user of a family member’s credit card. As long as the financial institution is aware that you are using the card and making the payments, it will count towards your credit and will reflect positively on your reports. This is a great way for younger people in particular to build their credit.
It’s also vital to your long-term financial recovery that you’re not late for a credit card or loan payment. To ensure you never miss a deadline, consider enrolling in auto-pay online, setting calendar reminders to pay your credit card bill in several small increments throughout the month, and consulting with a financial advisor. Though you may not have been led into declaring bankruptcy because of issues with credit cards, credit card debt remains one of the leading causes of bankruptcy and can sneak up fast.
5. Consider Credit Repair Companies
It may sound too good to be true, but there are legitimate and ethical credit repair companies out there ready to help you. Like any industry, though, there are some that are not trustworthy. Do your research but be cautious of any company that wants payment from you upfront or is vague about their expected results. They should also inform you that you can repair your credit without their help.
So what does a credit repair company do? They will analyze your credit report, handle all disputed items, and provide financial advising. They can be of great help to some people, particularly those too busy to dispute and follow up on negative items on their credit reports. They can be a tremendous help, especially in the beginning phases when you’re getting organized. In some cases they can help you with financial planning, such as creating a budget after bankruptcy.
6. Buy a Car After Bankruptcy
If you love cars, the idea of going through bankruptcy may be particularly painful. But just because you’ve gone through bankruptcy does not mean you’re condemned to drive clunkers the rest of your life. Depending on your taste in cars, you may have to temper your expectations, but there’s nothing stopping you from driving in style.
Before applying for a car loan after bankruptcy, bump up your credit score as much as possible. For many of us, a car is a necessity and not a luxury, so time may not be on your side. But the more time you let pass, the better standing your credit will be in (so long as you’re keeping up with your payments!), which means you’ll qualify for a better loan for a better car.
Don’t settle with the first offer from your bank or credit union, though. There are auto lending companies, such as Auto Credit Express and CarFinance, that specialize in working with people who have bad credit. These companies may have a better option for you. These companies aren’t scams or predatory, they’re just willing to take on more risk in exchange for higher payments. If you go with one of these companies over your bank, you can expect a bigger loan but with a higher interest rate. Given your circumstances and the class of vehicle you need, that may be just what you need.
7. Buy a House After Bankruptcy
One of the many reasons people resist declaring bankruptcy even when it’s their best option is that they think it will prohibit them from buying a house in the future. After all, it’s the largest purchase most people will ever make and requires a good deal of personal credit. Rest assured, however, that there are ways to mortgage your dream home even after you have been through a bankruptcy. Just like with credit cards, however, where you get your mortgage can make a world of difference. It’s an easy step to overlook; when you are shopping for a home, you’re understandably focused on the actual house. As someone rebuilding from bankruptcy, though, you should be just as selective when shopping for a mortgage. Shop around after seeing what your own bank or credit union has to offer.
Depending on which chapter of bankruptcy you declared, you will need to wait one to four years after your case has been discharged before you apply for a home mortgage loan. This time frame can also depend on what type of mortgage you’re applying for. In general, conventional loans require the longest waiting time, two to four years, while government-backed FHA and USDA (mostly in rural areas) loans are more lenient. Loans backed by the Federal Housing Authority are specifically designed for people with lower credit scores.
Be sure to check and educate yourself on all the details of each mortgage loan before applying. Also remember that a mortgage official will be interested in your employment history, so if you can avoid job-hopping in the years before buying your home, you’ll have a better chance at being able to finance the home of your dreams. This article on how to buy a house after bankruptcy goes into all of this in more detail.
Buying a home after a bankruptcy is not that much different than buying before a bankruptcy. There may be more steps involved, more hoops to jump through, but what you have in common with every other prospective home buyer on the market is that you have to start saving for a down payment. This is one of the places where going through bankruptcy helps out, as you should now have enough breathing room to start putting away a little each month. The rule of thumb is 20% of your income should go into savings, but if you can save more, you should absolutely do that.
Not only will your savings help with the initial costs of homeownership, it will also demonstrate to lenders that you’re becoming more fiscally responsible (though they will still focus on your credit history and score). Just remember that although a monthly mortgage payment can be lower than monthly rent, the upfront costs of homeownership can be substantial.
During this time in your post-bankruptcy rebuild, you may be approached by predatory lenders. These sketchy outfits offer payday loans and rent-to-own deals with high interest rates to recent bankruptcy filers. Be realistic with yourself that for the time being, you are a risky investment to most lenders; if someone comes along and offers a deal that seems too good to be true given your present financial situation, it probably is. It’s a shame, but there are bad people out there ready to pounce on folks who are already vulnerable and at their lowest point financially.
Life After Bankruptcy
As disciplined as you are in recovering from a bankruptcy, there’s no getting around the fact that it stays on your credit report for seven to 10 years. The next few years will be difficult but by no means impossible. Getting your finances back in order is very doable and can be done best and fastest by simplifying your expenses and watching every dollar.
By keeping a positive outlook and keeping to your new financial plan, those seven to 10 years won’t be lost or a waste of time; rather, they’ll become the training period you needed to set up for a lifetime of healthy financial decisions. Your long-term financial goals are still very much attainable, and the journey after them starts today.
May the next chapter of your life be the best chapter!