For those considering Chapter 7 or Chapter 13 bankruptcy, many feel that filing the papers in bankruptcy court means a financial death sentence, but if a debtor plays their cards right, this is hardly the case.
When most people file bankruptcy, their credit has already taken a hard hit. One look at their credit report, and they have 30, 60 or 90-day lates, chargeoffs, accounts sent to collections, and possibly leans, all of which damage a FICO score. Meaning, by the time the bankruptcy papers are filed, the credit score has already tanked by 100-300 points (if the debtor had good credit before).
While bankruptcy does affect a credit score initially, most of the damage was already done before the process was started. For many, if not most debtors, it will be much easier for them to bounce back and to improve their credit health if they file bankruptcy. Considering the alternative – getting deeper in debt and having more chargeoffs recorded on the credit report – bankruptcy enables debtors to rebuild their credit within a few short years.
Tips on Bouncing Back from Bankruptcy
So, what’s the magic recipe for rebuilding credit? How can someone go from filing a Chapter 7 to a 700+ FICO score within a few years of filing? In reality, it’s a lot like starting from scratch. Just imagine you’re 18-years-old and you’re trying to establish your credit. Reestablishing your credit after bankruptcy follows the SAME process:
- Search online for competitive credit card offers, preferably with 0 annual fees. Capital One is a great choice. While your initial credit line will be low, and the interest high, these cards are critical to your success. Don’t swear off credit cards – they are your new best friend. However, don’t charge more than 10% of the credit line each month and pay these cards off in full every month. Aim to obtain two to three credit cards and start using them immediately.
- Pay all of your bills on time, always. This includes your rent or mortgage, your utilities, cellphone bill and auto loan.
- Draft a monthly budget. If your expenses are more than your income, you must focus on increasing your income.
- If you’re spending too much each month, find ways to cut back on your spending. This could mean cancelling cable, packing your own lunch for work, brewing your own coffee and taking it to work, shopping the clearance racks, and taking hikes instead of going to the movies.
- Prove you are credit-worthy to new lenders. Once you’ve paid your credit cards on-time for 12 months, take out an auto loan, or get a department store credit card. Remember, make smart financial choices. Only charge a little each month on your store card and pay it off in full monthly.
Even if credit cards got you into this mess, they’re also going to get you out of it. The single mistake that bankruptcy filers make is not trying to rebuild their credit. But it’s critical that credit is rebuilt after bankruptcy. Why? Because, it makes life so much easier and it SAVES you money in the long run on interest, often it saves you thousands. All it takes is a little discipline on your part and you can be on your way to a 700+ FICO score in no time at all.