Rebuilding credit post-bankruptcy
The recent decline in the housing market coupled with the recession and sluggish economic recovery has increased bankruptcy filings in the United States. In 2010, 1.53 million personal bankruptcies were filed and a 2011 survey revealed that approximately 13 percent of the nation’s population has considered filing bankruptcy.
If you are one of the many that are considering filing for bankruptcy, it is important to understand a bankruptcy’s effect on your credit score. While bankruptcy will have a negative consequence, this does not mean you can’t start taking steps to rebuild your credit as soon as possible.
Understanding your credit score
Credit scores range from 300 to 850. The higher your credit score, you will be more likely to obtain a loan with a favorable interest rate. Your credit score is determined based on information provided by your lenders to credit reporting bureaus like Experian, TransUnion and Equifax. Your lenders will report all negative account activity – missing payments, making late payments, having past due accounts, filing for bankruptcy, being foreclosure on and carrying a high amount of debt. All these things influence your score. And the more negative events reported by your lenders to the credit bureaus, the lower your score will be.
Bankruptcy and your credit score
Chapter 7 and Chapter 13 bankruptcy will have a negative effect on your credit rating, but you can rebuild your credit post-bankruptcy. How fast you can recover from bankruptcy depends on how well you prepare after bankruptcy. To make the recovery process faster and less stressful, follow these steps:
- Create a reasonable budget and stick to it. After a bankruptcy, it is extremely important to understand your financial circumstances. A budget will help you spend within your means and prevent the accumulation of unnecessary debts.
- Pay your bills on time. This is one of the best things you can do to show financial responsibility. Lenders will want to see consistent and timely payments before approving you for a loan or other credit.
- Obtain a credit card and use it. Experts suggest obtaining a secured credit card. A secured credit card is one that you deposit a certain amount of money in a bank account and that amount becomes your credit limit. Charging small amounts to the card and paying them off every month, will help you gradually show lenders that you are financially responsible. You can use an unsecured card as well, but only charge what you can afford to pay off. Most people will receive credit card offers within a year after the bankruptcy.
- Open a savings account. It is important to save. Having an emergency fund will keep you from having to charge any future emergencies and keep you on budget. If you want to buy a car or a home post-bankruptcy, you will also need to save for a down payment.
Contact an experienced bankruptcy attorney
Rebuilding your credit after a bankruptcy will take time and effort, but for many people bankruptcy provides the fresh start needed to obtain financial freedom. If you are contemplating bankruptcy, contact an experienced bankruptcy attorney in your area. An attorney will guide you through the bankruptcy process and help you get back on your feet financially.