The way people feel after going through bankruptcy can vary widely. Many feel relieved, some frustrated, others battle-worn. It partly depends on the road they took to get there.
“Some people are ecstatic, it’s a big burden lifted,” says Michael Bovee, who has been working in debt settlement for 20 years and is the co-founder of Resolve. “For people with the heartbreaking stories of having blown through their retirement and other resources to avoid bankruptcy, I don’t know how relieved they are because they fought so hard to avoid it.”
One of the big misunderstandings Bovee comes across is that personal bankruptcy is a credit killer. Bankruptcy is a big deal and something not to be undertaken lightly, but it is better for your credit than other options like debt settlement or “only making the minimum payments on your credit cards, which compresses your credit for a decade or more,” he says.
Undoubtedly, bankruptcy will hurt your credit score, but it’s not forever. You can start rebuilding your credit as soon as your debts are discharged. A Chapter 7 bankruptcy typically takes about 90 days to complete. A Chapter 13 bankruptcy, however, can last as long as three to five years. Bovee recommends avoiding Chapter 13 when you can, but believes Chapter 7 can be a good option for many people.
“Bankruptcy is the quickest path to credit repair, but people don’t believe it,” he says. “They think they’ll be in credit purgatory for 10 years, which just isn’t true.”
Here are six steps to start rebuilding your credit after bankruptcy:
1. Start an emergency reserve fund.
If you can afford to sock away some money to create an emergency fund, you should. That’s important since you might not have the available credit to pay for an emergency expense. Paying in cash also means not having to worry about a credit card interest rate if you can’t pay off the balance in full.
2. Pay your bills on time.
The biggest factor in determining your credit score is how timely you pay your bills. Bill payment accounts for 35 percent of your FICO credit score. Post-bankruptcy, you’ll have a head start on bill payment if you still have open accounts like a mortgage, car loan or student loan. If you don’t have many credit accounts left, it’s time to start carefully building them back up.
3. Get new credit.
To rebuild your credit score, you need some credit in the first place. Many people think it will be a long time before they’ll be able to get a credit card again, Bovee says, but that’s not the case. You’ll probably start receiving credit card offers in the mail soon after your bankruptcy ends, but buyer beware. “Those are going to be subprime, 24% interest rate cards,” Bovee says. So you don’t want to carry a balance on those cards.
If you can’t get approved for a new unsecured credit card, try getting a secured one. With a secured card, you put down a deposit to “secure” the card and your deposit usually acts as your credit limit. These cards often have annual fees and high interest rates, but they can help you build up your credit payment history. Choose a card that offers a chance to convert your secured card to an unsecured one and that the payments will be reported to the credit bureaus.
4. Become an authorized user.
Becoming an authorized user on someone else’s credit card is a great, and simple, way to start rebuilding your credit. “You inherit their 10-year, perfect American Express credit history overnight,” Bovee says. Just make sure that it’s someone you trust and who is financially stable because if their credit history goes negative, yours can, too, he says. Likewise remember that how you use the card will impact the account holder’s credit (you do not need to receive the card for this to work).
5. Keep your credit balances low.
At 30 percent, the second biggest factor that makes up your credit score is your credit utilization, basically how much of a balance you’re carrying on your cards compared to your available credit. You should always keep your credit utilization under 30 percent, some experts recommend as low as 10 percent, but even better is to pay off your balance each month, especially after a bankruptcy.
6. Take out a small loan.
Going through a bankruptcy doesn’t mean you’ll never be able to get a loan again. You can get an FHA loan two years after bankruptcy, and sometimes a car loan with a 5-6 percent interest rate within a year, Bovee says. If you don’t have many accounts left, you might want to finance an affordable car or take out a small installment loan with a credit union to rebuild your credit history.
A Chapter 7 bankruptcy stays on your credit report for 10 years, and Chapter 13 for seven, but taking small, smart steps like those above can help you start improving your credit as soon as your bankruptcy is over.