You Filed Bankruptcy. Now What?
The process of filing and discharging a bankruptcy can be quite stressful. You probably didn’t wake up one morning, and decide that going to court would be a fun new adventure to try.
More likely, you were in severe financial distress, and delinquent on numerous credit accounts. You were probably receiving phone calls from debt collectors.
After discharging your bankruptcy, you’ll no longer be responsible for certain debts, although you’ll still be obligated on debts which were not discharged in bankruptcy. Filing bankruptcy, on it’s own, will usually have a severe negative impact on your credit score – it could reduce your score by as much as 200 points.
Of course, if you filed for bankruptcy, then you probably have accounts which were charged off and/or were placed in collections, which was already damaging your credit quite a bit. Having these obligations discharged through bankruptcy, will offset some of that reduction in your credit score.
Once you’ve been through the bankruptcy process, you’ll now want to focus on two things. First, you must sit down, and really ask yourself: What led to you filing bankruptcy, and how might you avoid this chain of events in the future?
If the bankruptcy was due to something like medical debts, there might not be a whole lot that you can do differently (we have limited control over falling ill). The same is arguably true if it was caused by a divorce.
However, if the reason for your bankruptcy was overextending yourself financially, then you’ll want to reassess your spending habits, and ask yourself what you might do differently. Are there some things that you might cut back on?
Or, perhaps you can create additional new sources of income? As the saying goes, “If you always do what you’ve always done, you’ll get back what you’ve always gotten.”
It’s now time to figure out a path forward – specifically, a path to rebuild your credit. After all, your credit score impacts everything from whether (and at what cost) you’ll purchase or refinance a home, buy or lease a car, rent an apartment, obtain credit cards, and even what you’ll pay for home and auto insurance.
1. Be Added As An Authorized User On A Credit Card
There’s a cost-effective, simple step you can take, to start rebuilding your credit today: Become an authorized user on a credit card. Basically, you’ll need to find someone who has had a credit card for at least two years (ideally longer), and has a strong payment history on the card (they’ve always paid on time).
You’ll also want to choose someone who does not overuse their card (i.e. they use less than 30% of the card’s limit). All of these factors help ensure that you’ll continue to benefit from this person’s good credit history.
What you are going to do is simple: Ask this person to add your name to the card. The card will now appear on your credit report, and help you rebuild your credit score.
How much impact does this card have? That varies, depending both on your credit history, and also how long the card has been open, and the spending limit on the card. We’ve seen our clients improve their credit scores by as much as 60 points, by use of this tactic, immediately following a bankruptcy.
Make sure you choose someone who has had the credit card for at least two years, and always pays on time. Also, you’ll want to select someone who doesn’t carry excessive debt on the card – ideally, they don’t use more than 30% of the card’s limit each month.
Anyone who spends too much on the card, or ever pays late, is not going to be helpful to your credit. Take your time to choose someone who uses their credit responsibly.
Sign Up For a Secured Credit Card
As part of the bankruptcy process, any credit cards which were in default were probably closed. As a result, you might not have any open credit cards. What’s more, getting approved for a credit card after going through the bankruptcy process can be quite difficult – in fact, the list of cards which will approve you is quite slim.
Fortunately, you do have an option: secured credit cards. With a secured credit card, you’ll provide a deposit, which often equals your spending limit. This makes the card basically risk free for the card issuer, because they don’t have to worry about whether you will stop paying on the card, causing them to lose money. In some cases, you will be able to place a deposit that is less than the spending limit.
Discover and Capital One offer two of the best secured credit cards on the market. With that said, these cards are not always friendly to folks who have filed bankruptcy in the past.
Therefore, you might want to consider the OpenSky secured credit card from Visa. This card does not require any background check, and thus is easy to obtain approval for. It does carry an annual fee of $35, but this is well worth it for the chance to improve your post-bankruptcy credit score.
You’ll want to pay the card on time each month. To ensure this happens, you may want to set up autopay, so that the amount you owe, is automatically deducted from your bank account on the due date.
You should also pay off your entire balance on the card. You will also want to try to keep your spending on the card relatively limited – ideally, spend no more than 30% of your card limit. If the card reports a higher balance, it could reduce your credit score.
If you were approved for a secured card with Capital One or Discover, then after anywhere from 8 to 12 months, you’ll be eligible to upgrade to an unsecured credit card. This means that your deposit on the card will be returned to you, and your spending limit will increase. You might also be eligible to apply for other credit cards, which will help you further build your credit.
If you signed up for the OpenSky from Visa, you probably won’t be eligible for an upgrade to an unsecured card (from Visa directly). However, after a year of having this card, you should have improved your score enough that you’ll be eligible for cards from other credit card issuers.
Open A Credit Builder Account
Besides opening a secured credit card, you might also want to consider opening a credit builder account. With a credit builder account, a lender will set aside a certain amount of money, in an interest-earning savings account.
Each month, you’ll pay the lender a fixed amount (potentially as little as $25), aimed at paying off that money the lender has set aside for you. Your payments will be reported to all three credit bureaus, allowing you to build positive payment history.
At the end of the loan term, you’ll have the amount you paid returned to you, minus a certain amount of interest charged (a credit builder account basically acts like a personal loan). Credit builder accounts also often don’t have any credit score requirements, or even run credit checks. After all, if you stop paying the loan issuer, they simply won’t give you the money that was set aside for you – there’s really no risk to the lender.
What’s unique about a credit builder account? Why not just use secured credit cards?
Credit builder accounts are treated as installment loans, which fall into a different category of credit than credit cards (which are revolving accounts). 10% of your FICO credit score is determined by the mix of credit you have.
This means that having installment and revolving accounts is better than just having revolving accounts, and will allow your credit to recover from bankruptcy more quickly. Also, if you hope to buy a vehicle or home in the future, having an installment account on your credit reports will be helpful.
You can find great credit builder accounts through your local credit union, or through Self Lender. If you are going to use a product offered by a local credit union, make sure that it reports to all three credit bureaus.
Make Sure Discharged Debts Are Listed As Discharged
When you file bankruptcy, debts which were included in your filing must be listed as discharged, with a balance of $0 owed. Sometimes, certain debts are not properly listed as discharged, and so will continue to have an unfair negative impact on your credit score. In other cases, collectors might try to continue collecting on discharged debts, which is not permitted by law.
You’ll want to visit Annual Credit Report, and order a free copy of each of your credit reports. Check the sections where each of your debts are listed, and confirm that those debts which were discharged in bankruptcy are listed as such. If not, you’ll want to write to each credit bureau, provide proof of your bankruptcy filing, and note that this debt was in fact discharged in bankruptcy, and must be listed as such.
The Final Word
By following these steps, your credit score will increase steadily. You’ll recover from your bankruptcy, and get life back on track. You could be eligible to buy a home in as little as two years (through the FHA and VA programs), and after you’ve shown several years of positive credit behavior, you’ll qualify for more and more credit cards.
Consistent effort will get you where you want to go. Don’t think of bankruptcy as a final defeat. Rather, view it as a new beginning – a chance to overcome the mistakes of the past, and ultimately grow.
