Bankruptcy Recovery Plan: How to Raise Your Credit Score After Bankruptcy

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Credit Sesame discusses how to raise your credit score after bankruptcy.

Bankruptcy is one of the most serious possible credit events. According to FICO, your credit score after bankruptcy drops between 130 and 240 points. The actual damage depends on how high your score was to begin with and how many missed payments, charge-offs and collections you racked up before filing. Fortunately, it’s possible to recover from bankruptcy in two or three years with careful credit management.

Steps to raise your credit score after bankruptcy

Recovery from bankruptcy does not happen overnight, but you can speed up the process by taking these steps:

  • Check your credit and make sure bankruptcy-related accounts are closed.
  • Monitor your credit score.
  • Make all payments on time.
  • Open second-chance accounts.
  • Create a budget.
  • Start an emergency fund.

The steps outlined above help you establish good credit, protect your score and avoid financial trouble in the future.

Check your credit report

When you file bankruptcy, chances are your accounts have been reported as delinquent. But once you file, the creditors should report the accounts as closed. If they do not do this (and this happens a lot), you keep racking up late payments and your balances appear to be months past due. This adds to the damage of a bankruptcy filing.

According to Equifax, “The accounts that were discharged in bankruptcy or foreclosure should be closed. If that information is not updated on your credit history, your credit scores may be penalized more than necessary.” If you see something you believe is inaccurate or incomplete on your credit reports, contact your creditor or file a dispute with the credit bureaus.

Monitor your credit score

Make sure that your credit recovery stays on track by monitoring your credit score. This helps you stay motivated and alerts you to important changes in your credit file. Monitoring also helps you catch credit report errors and head off fraud and identity theft.

Credit Sesame’s free monitoring service has no strings attached and does not require a trial period, a commitment or your credit card information.

Make all payments on time

Filing a Chapter 13 bankruptcy means you pay into a plan for up to five years. It’s critical to make that monthly payment on time, or the bankruptcy court could dismiss (deny) your bankruptcy. If that happens, the fact that you filed would still kill your credit score, and you lose the protection from creditors that bankruptcy provides. It’s the worst of all worlds, so do not let this happen.

Bankruptcy filings cancel most or all of your debts but student loans, child support and taxes are among the exceptions. You may choose to reaffirm certain accounts, like your mortgage or car payment so that you can keep your home or auto. Reaffirming a debt means you pledge to pay it as agreed. Paying your reaffirmed debts on time can help your credit score recover much faster by adding positive history to your credit report. However, reaffirming has other consequences — speak to your attorney before making any binding commitments.

Begin rebuilding credit

Once the court discharges your Chapter 7 or approves your Chapter 13 plan, you can start rebuilding credit. Chapter 7 provides a clean slate, and you are free to apply for credit with anyone willing to grant it. You may receive offers for second-chance credit cards, probably with high interest rates. However, that’s only a drawback if you carry a balance. And if you learn one thing from bankruptcy, it should be to avoid spending more than you earn and to make sure you do not carry credit card balances.

Other options for re-establishing credit after Chapter 7 include applying for a loan with a co-signer or co-borrower and paying it back in monthly, on-time installments..

If you’re working through a Chapter 13 plan, you must obtain permission from your bankruptcy trustee before applying for significant amounts of credit. The court may allow you to borrow small amounts without pre-approval but make sure you understand the rules before applying. Trustees typically approve loans only for a necessary and reasonable purchase, like a medical expense or to repair or replace a non-working car. You must be current with your plan and able to afford the new loan.

If your trustee won’t let you apply for a credit card, try for a secured card. Secured cards aren’t technically credit because you put up a deposit equal to the card’s limit. However, secured cards look like credit cards and can be used like credit cards. Many card issuers report your payment history to the major credit bureaus, so make sure you choose one of those — and avoid cards with high annual fees, monthly maintenance fees and transaction fees.

Finally, you can build positive payment history by becoming an authorized user on a friend or relative’s credit card. You don’t need to use their account (maybe even best if you don’t) but their payment history appears on your credit report and improves your score. Make sure you only ask someone with great credit — you don’t want their mistakes to add late payments to your credit file.

Create a budget

Bankruptcy can get you out of debt and set you up for future financial success — if you learn from your mistakes. Making and sticking to a budget is a proven way to avoid spending more than you earn, which should keep you from carrying credit card balances and accumulating too much debt.

There are many budgeting and tracking tools available — from slick mobile apps to low-tech envelope systems. It doesn’t much matter how you budget as long as you budget.

Start an emergency fund

Personal finance experts recommend that everyone keep enough to pay two to six months of expenses in an emergency fund. That’s in case you experience an interruption in income, like a job layoff, or an unexpected expense, like a costly medical procedure.

However, most emergencies can be covered with just a few hundred dollars. Here’s how to start:

  • Find one regular expense you can skip (like eating lunch out every day) and direct what you save into your emergency savings.
  • Front-load your emergency fund by selling unwanted things. This can provide a satisfying chunk of money – and the motivation to keep saving extra money.
  • Open up a line of credit, but don’t touch it. Reserve this for emergencies only. Having access to funds can reduce the amount of cash you need in an emergency fund.
  • Deposit at least some of any windfall you receive, like a tax refund, into your emergency fund.
  • Split your payroll deposit between your savings and checking accounts.

How long does it take to recover from bankruptcy?

Chapter 13 bankruptcies remain on your credit report for up to seven years, and Chapter 7 bankruptcies impact your credit score for up to ten years. However, that doesn’t mean your credit will be garbage for years to come. In fact, filing for bankruptcy can stop the bleeding and help you rebuild your financial life faster than you think. By managing debt wisely, your credit score after bankruptcy can rebound substantially in just one-to-two years.

In fact, Federal Reserve researchers found that on average, “credit scores start to recover immediately after the bankruptcy filing and are (for most filing periods) back to their prebankruptcy level about six quarters after the filing.” That dovetails with FindLaw’s claim that you can achieve a “fair” credit rating (up to a 669 FICO) within 12-18 months after filing bankruptcy.

Finally, most mortgage programs require waiting periods of two to four years following a bankruptcy discharge. However, FHA, VA and USDA mortgage programs allow Chapter 13 filers to get a mortgage after 12 on-time payments into their plan if their bankruptcy trustee approves.

Bankruptcy is a drastic solution for serious problems, but it’s not forever. The day you file can be the first step towards a better financial future.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Gina Freeman
Gina has been writing consumer-centric content in the personal finance, business and investing for nearly 20 years. She loves making challenging or even “boring” topics accessible and helping readers feel educated and confident in their decisions.

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