Filing for bankruptcy doesn't permanently damage your credit. This is one of the most common myths about bankruptcy, and a common reason why most people shy away from filing. A Chapter 7 bankruptcy will remain on your credit record for up to ten years, whereas a Chapter 13 bankruptcy will be purged by the credit reporting bureaus after seven years. However, that is no different than missing a couple of credit card payments and having them appear on your credit report for years. Unless you've always made on-time payments on all of your loans, you probably have negative credit and a low FICO score. Unlike missed payments, bankruptcy provides you with a clean slate and the opportunity to rebuild your credit score. In the end, that's all that matters to anyone looking at your credit record.

If you or a loved one is struggling to settle your outstanding debts but is nervous about your credit score after filing for bankruptcy, then you should keep on reading. This blog focuses on essential steps that will help you rebuild your credit after bankruptcy.

Make a Budget

Setting a budget that you can comfortably stick to takes some effort. Don’t just approximate your expenses and revenues. Instead, start with the facts from the Schedule I and J forms and pay close attention to how frequently you are paid. If your costs exceed your income, strive to improve your income or reduce some of your spending. It's difficult to stick to a budget, but with some effort, it's possible. Certain monthly bills do not change, like rent and car insurance, so sticking to the financial plan will be simple.

Discretionary spending, such as groceries and entertainment, is where issues could be a little more complicated. The best way to stick to your plan for these products is to keep track of every penny spent. This is especially vital if you're seeking to stick to your budget if it's your first time. It'll become automatic after a while. After several months, you can use the details you've obtained to modify your budget as needed to better suit your needs.

Include an Emergency Fund in Your Financial Plan

You should try to save a portion of your income if at all possible. You can accomplish this by including an emergency fund as an expenditure in your financial plan. Then, develop a plan to ensure that this amount is deposited into your savings at least once a month or on payday. It's recommended that you settle the emergency fund first before spending on other expenses. This will aid in the development of a financial cushion if something unexpected happens. Like when the water heater breaks down or getting a surprise medical expense. If at all possible, avoid using the money you have set aside for monthly payments and other regular expenditures for these unusual (and often unexpected) expenses. You also wouldn't want to be forced to take out high-interest quick loans.

Keep Track of Any Outstanding Debt That Passed Through the Bankruptcy Case

If you have a car loan after your Chapter 7 bankruptcy, pay all of your dues on time, every time. This is appropriate whether you refinanced your debt or took out a new loan to get your car back. While your vehicle loan lender could not disclose your installments to the credit reporting agencies if the reaffirmation was denied, you could still be able to produce your payment history to demonstrate your creditworthiness. If you had to give up your vehicle to take out a new loan after declaring, then it's more important that you meet all installments as scheduled.

It might not be simple if you've had several non-dischargeable debts, such as tax debts or a student loan. Nonetheless, these debts should not be ignored. Consider having your student loan rehabilitated or signing up for an income-based repayment plan. Set up a repayment schedule for tax debts so that you can clear off the outstanding balance slowly but steadily.

Obtain Authorized User Status on Another Person's Credit Card Account

It's a great way to start rebuilding credit by being identified as a legitimate user on another person's credit card. Even if you're not personally liable for the debt, smart credit card spending and on-time payments can help you build your credit. (This is not the case with co-signers.) It's not a necessity for a person to use his or her credit card to enjoy the benefits of being an approved user.

However, keep in mind that not every credit card firm includes approved users in their reports. Also, double-check that the individual whose card you are using has a positive payment history and credit score. You wouldn't want this to go wrong, specifically if the individual on whom you're relying is a close family member.

Obtain a Secured Credit Card

This type of credit card operates similarly to unsecured cards, with the exception that you must make an initial deposit to the credit card provider before you can start using the credit. You continue to be charged interest, and your on-time installments are recorded by credit bureaus. This aids in the development of positive payment history. A secured card should have the following features:

  • Reporting to credit agencies—Confirm that the credit card provider will provide your account and billing details to all 3 major credit reporting agencies, that is, Experian, TransUnion, and Equifax. This information gives you a higher chance of improving your credit ratings
  • Rates and fees—When compared to unsecured cards, the interest rates and fees may be significantly higher. Make sure you evaluate the annual percentage rate (APR), maintenance fees, annual charges, and any other costs to select the ideal secured credit card and keep your expenses to a minimum
  • Conversion option—After a certain amount of time, your secured card should "convert" to an unsecured credit card. Provided that you've settled your balance, you'll get your money back once it converts. You could also continue to use the credit card to assist you in improving your credit record
  • Deposit amount—A higher credit limit means that you will pay a higher deposit to use your secured card. You can enhance your credit usage ratio and rating by having more accessible credit that you aren't using

Obtain a Credit-Building Loan

For credit builder loans, the lenders (like banks, credit unions, or organizations) put the funds into savings on your behalf. After that, you could make payments over time. Unlike lines of credit, which allow you to access funds at any time, you'll receive funds from a credit builder loan once you've completed your monthly installments.

Other Billing Information Should Be Disclosed

Some firms allow you to establish your credit record by providing payment information for items like phone bills, rent, and/or utilities. Sticking to your financial plan and paying your monthly payments as scheduled will help you improve your credit rating.

Get a Standard Credit Card

Obtaining a credit card could, of course, aid in the development of a positive credit rating. You will almost certainly receive a lot of offers from credit card issuers via mail before your bankruptcy process is completed. However, be cautious because several credit card firms impose hefty interest rates on individuals who have recently filed for bankruptcy. If you do decide to get a credit card after declaring bankruptcy, only charge what you can afford to cover at the end of every month, and resist cards with high annual fees.

Develop Decent Debt Management Practices

Make a habit of paying more than the required monthly payment, even if you can't afford to raise the entire sum. Also, pay attention to your credit usage percentage. Credit balances should not exceed 30% of your total credit line. Going over would harm your credit rating, even if you had lots of accessible credit. Finally, you should take measures to ensure that you stay in control of everything. This entails making sure that all debt installments are made on time. However, it also requires keeping track of your credit score frequently. If you follow these guidelines, your credit will be able to bounce back from any minor hiccup:

  1. Pay Off All of Your Debts on Time

The single most important component in evaluating your credit rating is your payment history. When you settle your credit cards and loans on time, your credit scores are updated with new, positive details. This improves your credit rating and demonstrates to future lenders that you're a trusted and reliable borrower.

  1. Avoid Using Credit Cards if Possible

Using a card and paying your bills on time is an excellent way to establish credit. However, contrary to the norms, maintaining good credit does not necessitate having debt on your card. Paying off your credit balances—and continuing to pay them off—is, in a real sense, one of the greatest and quickest ways to develop good credit.

  1. Keep Track of Your Bills

Paying your monthly bills, such as your telephone and utility bills, helps you avoid extra charges and keeps your records from falling into the collectors' hands, which can harm your credit. On-time payments for your phone, electricity, and even cable and video streaming bills could help you boost your ratings with the credit agencies. The free service offers you an on-time monthly payment credit that formerly could not assist your credit, typically leading to an apparent increase in your score.

  1. Give It a Chance

Quick fixes for credit tend to generate more complications than they resolve. Credit repair firms claim to be able to quickly rehabilitate your credit, but their services come at a cost and could come with significant risks. At the end of the day, working on your credit personally is the best and most convenient way to improve it.

Keep an Eye on Your Credit

Rebuilding credit following bankruptcy, of course, necessitates maintaining a tight check on your credit record as well as your spending habits. It is the only way to track your progress and verify that your credit restoration efforts are effective. The good thing is that you are eligible for a free credit report from each of the major credit bureau agencies once every year. Therefore, create a plan to visit their website once a year to obtain a free credit report. You shouldn't have to complete all three credit bureau agencies at once. You could spread them out over the year.

Obtain a Cosigner for a New Loan or Credit Card

Another option is to have a close friend or family member co-sign your credit. You could nudge your scores back up and get into shape by making timely loan payments. Your cosigner could be a close friend or a family member, but she or he needs to have an excellent credit rating to compensate for your score. They must also be informed that if you fail to repay the loan, then their credit ratings will be affected. If you're not sure if you'll be able to pay back the debt, it's normally not worthwhile to drag your close relatives or friends into the muck with you. Cosigners are best suited for those with stable earnings who, if not for their negative credit rating, wouldn't have difficulty acquiring and paying the debt on their own.

Be Wary of Job-hopping

Since lenders frequently consider your career history when issuing a loan, having a solid job and consistent income could increase your odds of securing a loan. This is because lenders may view your potential to repay your loans more positively if you have a stable job. While changing jobs may be acceptable, having income gaps may make you appear riskier to lenders. Since your credit rating is shaky following bankruptcy, you would want to ensure that as many financial gaps are covered as soon as possible.

Having steady earnings and not moving from job to job can make you appear more appealing to lenders. Check to see whether a lender's employment history is taken into consideration when making a decision. Be ready to submit additional income proof if you are self-employed or have a side job. The more paperwork you can offer demonstrating a continuous income, the better.

FAQs About Rebuilding Credit After Bankruptcy

Frequently asked questions about rebuilding credit include, but are not limited to:

How Long Would It Take to Get Your Credit Back After a Chapter 7 Bankruptcy?

A bankruptcy will remain on one's credit file for ten years. However, if a person declares Chapter 7 bankruptcy, the borrower's debt-to-income ratio is quickly and drastically reduced, perhaps paving the way for a soaring credit rating one year or two later. You also lose your eligibility to file a Chapter 7 bankruptcy for the next 8 years. From the perspective of a prospective lender, you might appear as a better risk right away.

How Long Does Rebuilding Credit Take After Filing for Chapter 13 Bankruptcy?

Most Chapter 13 clients will see a decrease in their debt-to-income ratio, although it will take longer. After 3 to 5 years of staying on a tight budget, Chapter 13 debt holders should be notably better qualified to handle their finances. In many circumstances, a Chapter 13 petitioner could refinance himself or herself out of bankruptcy after eighteen months of constant Chapter 13 payments, particularly if the petitioner has any equity or assets in his or her residence.

Is It Possible To Receive Credit After Declaring Bankruptcy?

Yes. There are a few options to obtain credit after bankruptcy. However, it would be difficult to locate a creditor willing to provide the debtor with competitive products. You could be eligible for the following forms of credit:

  • Car Financing—A Chapter 7 debtor can finance a vehicle the day after declaring bankruptcy. A Chapter 13 debtor, on the other hand, would be allowed to finance a vehicle while his or her repayment schedule is still in place. However, the trustee's consent is required after demonstrating that the vehicle is essential to fulfill the debt payments
  • FHA-insured Mortgage—If a Chapter 13 petitioner has made monthly repayments on time for one year and the defendant has gotten the court's consent, he or she may qualify for an FHA-insured mortgage. Debtors who have been discharged from a Chapter 7 bankruptcy should wait for a minimum of two years to establish a good credit history
  • Conventional Mortgage—It would take eighteen to twenty-four months for a petitioner with re-established solid credit to acquire a mortgage loan following the bankruptcy. Borrowers with poor credit should expect to pay interest rates ranging from 2 to 3 percentage points more than the standard rates

Find a San Diego Bankruptcy Lawyer Near Me

Rebuilding credit after bankruptcy is achievable if you are proactive and determined to take the required actions to develop a strong credit record. While restoring credit after filing is considered a medium or short-term effort, retaining good credit ratings is a long-term project that requires commitment. There are many attorneys whom you may trust, but only a select few can provide the level of service that you need. At San Diego Bankruptcy Attorney, we are dedicated to providing quality legal services to achieve the best possible outcomes. Call us at 619-488-6168 if you are considering bankruptcy.