Rebuilding Credit After Bankruptcy (A Guide)

Filing bankruptcy does not ruin your credit forever! That’s one of the biggest myths surrounding bankruptcy and often the reason why people delay filing. If you’re struggling to pay your debts but are worried about your credit rating after a bankruptcy, this article is for you. 

It’s true that a Chapter 7 bankruptcy stays on your credit for up to 10 years (Chapter 13 bankruptcy is removed by credit reporting agencies after only 7 years). But, that’s no different than the fact that you missed a bunch of credit card payments staying on your credit for years. 

Unless you’ve made timely payments on all debts - always - you probably already have bad credit and a less than ideal FICO score. Unlike the missed payments, filing bankruptcy gives you a fresh start and the chance to improve your credit score. And ultimately, that’s what anyone looking at your credit report will care most about. 

Improving Your Credit Score After Filing Bankruptcy Is Possible 

In fact, it’s easier than improving your credit score after years of bad notations from missed and late payments. But, it’s not automatic. You will have to be proactive and deliberate about the steps you take to rebuild your credit after your bankruptcy discharge has been granted. 

The first thing you’ll want to do is make sure that you don’t have to take on new debt to meet your regular living expenses. Only then can you be sure that applying for new credit won’t end up putting you in the same spot you were in before filing for bankruptcy. 

Create A Budget (& Stick To It)

Creating a budget you can stick to requires some work. Don’t just estimate your income and expenses. Instead, use the information from your Schedule I and J bankruptcy forms as a starting point and make sure to pay attention to how often you’re paid. If your expenses are greater than your income, try to find a way to increase your income or cut some expenses.

Sticking to a budget can be hard, but with a little practice it’s really doable. Certain monthly payments don’t change (think rent, utilities, car insurance), so sticking to them will be easy. The discretionary expenses - like groceries, gas, and entertainment - is where things tend to get a little tricky. The best thing you can do to stay within your budget for these items is to track every dollar you spend. 

This is especially important if this is the first time that you’re trying to stick to a budget. After a while, it’ll become second nature. And, after a few months of doing it, you can take the information you’ve gathered and adjust your budget as necessary to better meet your needs. 

Build An Emergency Fund Into Your Budget

If possible, you’ll want to make sure that a certain amount of your monthly income goes into a savings account. You do this by making the emergency fund one of the expenses in your budget. Then, make a plan to make sure this amount actually makes it into your savings account every month - or every payday. (Some things are easier to budget on a per payday basis, rather than on a monthly basis.) Don’t just wait to see what’s left after paying for everything else.

This will help you build a financial cushion in the event something goes wrong. Like the water heater breaking. Or getting an unexpected medical bill. You don’t want to use the money you’ve budgeted for bills and other monthly expenses for these extraordinary (and often emergency) expenditures, if you can avoid it. And you don’t want to be stuck having to get a high interest short-term loan either. 

Use What You Learned In Your Financial Management Course For All This

Remember that second bankruptcy course you have to complete before getting your discharge? It’s all about financial management. Take what you learn there and apply it to your daily life. And don’t forget, there are a ton of free tools available to help you stay on track! Find one that you like (even if it’s just a Google Sheet) and make it work for you. 

7 Steps To Improve Your Credit Score After Filing Bankruptcy 

Now that we’ve covered how you can avoid relying on credit, let’s take a look at how to actually improve your credit rating. 

(1) Keep Up With Any Debts That Survived the Bankruptcy Filing

If you’re coming out of your Chapter 7 bankruptcy filing with a car loan - make all payments on time, every time. This is true whether you reaffirmed the loan or took on a new one to redeem your vehicle. While car loan lenders may not report your payments to the credit bureaus if the reaffirmation wasn’t approved, you may still be able to use your payment history as proof of your creditworthiness down the line. If you surrendered your car and had to take on a new loan after filing, it’s even more important to make all payments on-time.

It may not be quite that simple if you had a lot of non-dischargeable debts, like student loans or recent tax debts. Still, don’t ignore these debts. Look into getting your student loans rehabilitated or sign up for one of the income-based repayment options. For tax debts, get set up with an installment plan so you can slowly but surely pay off the balance. 

(2) Become An Authorized User On Someone Else’s Credit Card Account

Being listed as an authorized user on someone else’s credit card is a perfect way to get started building your credit.^[1] Responsible credit card usage and on-time payments can improve your credit even though you’re not on the hook for the debt. (The same is not true for co-signers.) You don’t even have to use the credit card to get the benefit of being an authorized user. 

Be aware, though, that not all credit card issuers include authorized users in their credit reporting. And, make sure that the person whose credit card you’re on has a good payment history and good credit. You don’t want this to backfire, especially if the person you’re relying on is a family member.  

(3) Get A Secured Credit Card 

A secured credit card works just like an unsecured card except that you pay a deposit to the credit card issuer upfront and then borrow against it. You’re still charged interest and your on time payments are reported to the credit bureaus. This helps you build a good payment history. 

(4) Take Out A Credit Builder Loan

For a credit builder loan, the bank, credit union or nonprofit acting as the lender deposits the money into a savings account for you. You then make payments over a period of time. Unlike a line of credit, where you can access the money any time, you’ll get the money from your credit builder loan when you’re done making the monthly payments. 

(5) Report Other Payment Information

Some companies (like Experian, for example) give you a way to build your credit history with payment information for things like rent, cell phone bills, or utilities. Following your budget and making these payments on time every month can help boost your credit score. 

(6) Get A Regular Credit Card

Getting a new credit card can of course help you build a good credit rating. Before the bankruptcy process is over, you’ll likely get a number of credit card offers in the mail. Be careful with this, though, as many credit card companies charge a high interest rate for someone who just completed a bankruptcy filing. If you do take out this type of credit card after filing, only charge as much as you can pay off at the end of the month and avoid cards that charge a high annual fee. 

(7) Build Good Debt Management Habits

Get in the habit of repaying more than the minimum payment every month even if you can’t quite pay off the full balance. And be mindful of your credit utilization ratio. You want your credit card balances to be no more than 30% of your total credit limit. Going over - even if you still have plenty of available credit - will hurt your credit score.  

Finally, you’ll want to take steps to stay on top of everything. That means making sure all debt payments are timely. But it also means making sure that you monitor your credit on a regular basis. 

Monitoring Your Credit

Of course, rebuilding credit after bankruptcy requires keeping a close eye on your credit report in addition to keeping an eye on your personal finances. It’s the only way to track progress and ensure your credit repair efforts are making a difference. 

The good news is that each one of the three major credit bureaus (TransUnion, Experian, and Equifax) has to provide you with a free credit report once a year. So make a plan to go to annualcreditreport.com to get your free credit report once every 12 months. You don’t have to do all three at the same time, you can stagger them throughout the year. 

Not only will this help you track your own hard work to re-establish a good credit rating, it can help you catch errors, like a bank incorrectly reporting your payment history, for example. You can (and should) dispute any and all errors in your credit history. 

Let’s Summarize...

Rebuilding your credit after filing bankruptcy is possible as long as you’re proactive and committed to taking the necessary steps necessary to establish a good credit history. While rebuilding credit after bankruptcy is a short or medium-term project, maintaining good credit is a long-term commitment. 

In other words, don’t just think in terms of how to build credit after bankruptcy. Commit to better budgeting, careful management of credit accounts, and making informed financial decisions to keep your credit rating healthy for good.