Bankruptcy – You WILL Have Great Credit Again – Sooner Than You Think!
Raise your hands – everybody who thinks bankruptcy somehow spells the end of your good reputation. How many of you think that bankruptcy dooms any hope that you’ll ever attain a decent FICO score again – or a car or a home loan? Well, everybody put your hands down, because you’re wrong, fortunately.
Most people fear bankruptcy because they think that it’s somehow shameful, that it will follow them the rest of their life, and that they’ll never be free of black marks on their good credit scorecard. This is simply not true. Once again, let me remind you that if you’re in an overwhelming situation financially that there’s no way you can possibly deal with, bankruptcy is simply:
“…a legal process designed to help individuals and businesses either eliminate their debts or repay them…”
Bankruptcy Does Not Brand You with the Scarlet Letter “B” for “Bankruptcy!”
People from our parents and our grandparent’s generation were terrorized by the specter of bankruptcy. Somehow bankruptcy is still synonymous with the idea that you’ll lose everything and be reduced to standing in bread lines and living in a cardboard box. But folks – the Depression was officially over in 1939, almost 80 years ago. And the Great Depression was exactly why Federal laws have since been enacted that make bankruptcy a viable option, and certainly a much healthier one! So please – read my lips – bankruptcy = a fresh financial start = a way back to solvency!
Yes, bankruptcy is difficult, but it simply isn’t the horrifying ordeal that you think it will be, and it doesn’t mean that you’re facing years of no credit, or that you’ll never again have any kind of “normal,” happy financial life like, say – a home, a car, decent clothes, and a night out with dinner and a movie once in awhile. Many, many people – if not the majority of them – rebound from a bankruptcy and end up in even better financial shape than before.
So, the good news is that you can start rebuilding credit the minute your bankruptcy is over. The even better news is that you can have excellent credit again just by following a few rules, paying attention, and being consistent.
The Two Steps You Need to Take to Rebuild Your Credit After Bankruptcy
Once all the paperwork is filed, everybody has been notified, the bankruptcy is over, and the dust has settled, there are two avenues of action that you need to start rebuilding credit. Each action item has multiple steps, and requires time, commitment and consistency. Plus – you need to really do them for them to work. However, if you just follow through with these two steps – they are virtually guaranteed to put your financial life back together for you.
FIRST STEP: Monitor Your Credit Report and Correct It – Over and Over Again
Six months after you’ve filed, contact the three credit reporting agencies – TransUnion, Experian, and Equifax, and ask them for you credit reports. Carefully and systematically examine these, and dispute any and all errors/mistakes/inaccuracies you find. There will always be some, perhaps even many. Credit reporting agencies are notorious for getting things wrong, and people generally don’t question it because it’s such a hassle.
But if you’ve filed for bankruptcy, you don’t want more negatives there than there actually were, so you do need to question things to “set the record straight,” because you need your credit report to accurately reflect what your financial status is.
When you find an inconsistency, go must through the steps to correct it. Each agency has clearly listed steps for you to do this, and they include things like making copies of everything you send, sending things by registered mail, documenting everything, etc. Whatever it is – do what they tell you to do. Then, here’s the tricky part – you need to keep going back to check on it every couple of months to make sure they followed through
When you go through a Chapter 7 bankruptcy, the debt to each creditor is discharged, and that means its gone, over, done. Sometimes things fall through the cracks, but you don’t want a company that should have closed their file on you coming back months or years later saying you haven’t paid. Yes, this is a hassle, but yes, it happens, and yes – this is where patience, thoroughness, and consistency pays off.
SECOND STEP: Re-establish Your Credit – in Baby Steps!
Many people think it will be years before they can get any kind of credit at all, but – again, this is not true. Interestingly, after you’ve filed for bankruptcy and it’s gone through, you will start receiving credit card offers in the mail pretty quickly, and even offers of loans through certain companies.
In order to re-establish credit with credit cards, you need to be smart, and read these offers very carefully. Many – if not most – will have outrageous annual fees or interest rates, but some will be somewhat reasonable. Not great, but reasonable, and – hey – you have to start somewhere. For these, there are a couple of ways to go:
- Get a secured credit card: One of the easiest ways to start re-establishing your credit is to apply for a secured credit card with your local credit union or bank. A “secured” credit card means that you give the bank some money to hold and the bank gives you a credit limit of that amount. You can use the card like a regular credit card, just more than the minimum and make the payment on time – and religiously! But don’t pay it off entirely, always leave a balance of $10 or so. The credit card companies want to make money on you, and the only way to keep them happy on this score is to accommodate them.
- Get an unsecured credit card with an interest rate that isn’t completely insane: If you apply for an unsecured card they will generally start you with a very low credit limit to see how you do, usually around $300. This is fine, but again – just make sure you pay on that card on time! You can avoid the high interest rates by charging something, then immediately paying it off. But again, don’t pay it off entirely every month, leave a $10 balance. Remember the importance of keeping the credit card companies happy. You can request a credit increase every 12 months. Being responsible with the credit card will pay off!
- Get a loan: Again, people are shocked that applying for and getting a loan is a possibility so soon after a bankruptcy, but it is. Again, however – you need to be smart and judicious about this, and realize that it’s actually a means to an end, not a way to finance a spending spree. Institutions that loan people money want lots of reassurance that they will have something in their hands if you don’t pay it back however, so here are a couple of ways to do this:
- Go to your bank and get a collateralized loan: Go to a bank or – even better – a credit union, and buy a CD for $1000, then use this as collateral for a personal loan of $1000. Banks and credit unions love to loan money when they’ve got air-tight collateral, and if you buy your CD from them, they can place a freeze on your account should you be unable to pay it. This isn’t going to happen, however, because you are using the money you borrowed to pay back the loan.
- Trade in your used car for a new used car: A lot of people don’t realize that – if you’ve been making regular payments – you don’t lose your car in a bankruptcy. You can use that car to get into another used car with a loan. Getting a car loan is a great way to start rebuilding credit. You should know that there are a lot of companies now that will give you a loan the day after you’ve filed your bankruptcy papers. Yes, their interest rates may be at 15%, but – it’s a loan – and a loan is a loan is a loan. Making payments on a car loan will immediately start racking up a positive credit record to counteract the negative one.
- Set up automatic bill pay: On-time payments are vitally important in terms of any new, post-bankruptcy credit card or car loan you have – they are your path back to a great credit score, so don’t trust your memory, just have it taken care of automatically. One of the smartest moves to make post-bankruptcy is to set up automatic bill pay at your bank for every single one of the bills you pay monthly – all of them. Rebuilding credit means you have to re-establish credibility that you are a responsible citizen capable of making consistently on-time payments.
Just remember, as you begin your post-bankruptcy recovery, be aware that you will be denied – at first. But don’t let a few rejections slow you down, stay positive! Don’t apply for every credit card in sight; too many hits inquiring about your credit score will count against you too. Just take it slowly and keep your focus on your ultimate goal of achieving a perfect credit score again!
Finally – probably the greatest thing to remember about recovering from a bankruptcy is that time is the great equalizer. Time heals all wounds – and all bankruptcies. Recovering your good credit will happen eventually if you just pay your bills on time – that’s all. Just pay your bills, pay them on time, and then wait for time to pass, and your little financial boat will right itself and sail happily into the sunset on it’s own. As Robert Schuller said:
“Tough times never last – but tough people do…”