Your Guide To Rebuilding Credit After Bankruptcy

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. Chapter 7 bankruptcy will stay on your credit report for up to 10 years, but many filers are surprised to see how quickly they can rebuild their credit... especially if you're coming from a history of making lots of late payments or missing payments. In that case, your credit score might actually improve if you file bankruptcy.

Yes, You Can Improve Your Credit Score After Filing Bankruptcy

Rebuilding your credit after filing bankruptcy is often easier than improving your credit score after years of bad marks from missed and late payments. But, it’s not automatic. You'll have to be proactive and make a plan to rebuild your credit after your bankruptcy goes through. 

A great first step is making sure that you don’t have to take on new debt to meet your regular living expenses. This way you can be sure that applying for new credit won’t lead you back to 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 (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. There are a lot of free apps that make this process much easier.

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. 

Start an Emergency Fund

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 the Bankruptcy Financial Management Course

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 spreadsheet) and make it work for you. 

7 Tips 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. 

Tip 1: Make a Solid Plan To Repay Your Car Loan or Other 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 recent tax debts. For tax debts, get set up with an installment plan so you can slowly but surely pay off the balance. 

Tip 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 great way to start 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.  

Tip 3: Get a Secured Credit Card 

A secured 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 reporting agencies. This helps you build a good payment history. 

Tip 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. 

Tip 5: Report Your Rent, Utilities and Other Payments to the Credit Bureaus

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. Learn more about this in our self-reporting to build your credit article.

Tip 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 high interest rates for recent bankruptcy filers. If you do take out a 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. 

Tip 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. 

What's the Easiest Way To Monitor 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. It can also help you detect potential identity theft or other issues.

The good news is that each one of the three major credit bureaus (TransUnion, Experian, and Equifax) has to provide you with a free weekly credit report. You may not need to pull all three reports every week, but mark a consistent time on your calendar to download and review your credit reports. This could be monthly, quarterly, or whatever time period works best for you.

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.