Bankruptcy can feel like a life sentence for a credit score. The good news is most filers see their score return to near-600 or better within a year, according to recent data from the Consumer Financial Protection Bureau (CFPB); by two years, more than half are in the mid-600’s. In fact, you can begin repairing your creditworthiness in as little as six months. Once the report improves, filers often come to appreciate, rather than regret, the virtual “blank slate” Chapter 7 discharge offered.
If you’ve filed, or are preparing to file, for Chapter 7 bankruptcy, there are a number of steps you can take to quickly repair your credit. In general, rebuilding your creditworthiness comes down to quickly securing a line a credit you know reports to bureaus responsible for scoring; carefully maintaining a low balance, while still using your credit; and actively monitoring your credit score throughout for errors and discrepancies. There are pitfalls, such as receiving too many application denials too quickly, or not correcting errors on your report in a timely manner. Once you understand the basics, however, it becomes easier to fix your credit.
Credit reporting works by analyzing your ability to repay debt. This ability is quantified in two ways. The first way--and simplest, immediately following a Chapter 7 discharge--is a low debt load relative to income. Chapter 7 will discharge most, if not all, of your current debt, making this a bigger issue later in your creditworthiness quest. The second way reporting agencies analyze your creditworthiness is through your demonstrated history of repaying debts, such as making card payments. Though it may seem paradoxical, that’s why it’s important to secure new credit as soon as possible following discharge. But you have options, such as getting someone to cosign on a new loan. Above all, you need to manage that new debt carefully--federal law prohibits another Chapter 7 bankruptcy discharge filing before eight years have passed from the previous one.
Your lawyer might offer additional information about fixing your score, particularly in relation to the details of your filing. For most, however, your lawyer will primarily focus on managing the bankruptcy case itself. Most of these cases allow people to easily improve their scores on their own, following discharge
First steps to repairing credit after your bankruptcy
Before you do anything else, stay on top of any obligations not discharged by your Chapter 7 filing. Typically, these include student loan payments, child support obligations, alimony, back taxes, monetary court judgments and any debt you chose to reaffirm through the bankruptcy. Reaffirmed debts might include payments on a loan for a car that you use to commute to work. Failure to continue these payments will further damage your ability to repair your creditworthiness.
** Read out 8 Tips to Repairing Your Credit blog post for in-depth information on this topic **
Employment
One building block to rebuilding your score is employment. Stable employment is necessary to fix your credit in earnest. Before you apply for any kind of loan, you need to start generating consistent income. If you were employed when you filed for Chapter 7, then you’re already in a great place to repair your credit. Where possible, some experts recommend avoiding changing employers while rebuilding your credit. Multiple job changes can reflect poorly on your ability to repay. However, that warning should mostly apply to those leaving for similarly-paying jobs. For those taking a better job, an increase in salary or pay rate will likely counteract any negative impact from the change of employers. You should check with your attorney if you are unsure whether to take a new job.
Securing your first credit line
Though difficult, rebuilding your score means getting a new line of credit as quickly as possible following discharge. This can seem like a “Catch-22”--you need creditworthiness to build creditworthiness. As such, your first post-bankruptcy credit line will typically carry a high-interest rate or will come from a “secured” line. Secured lines work by requiring you to lay down a deposit equivalent to the credit line. For example, you’ll provide a deposit of $500, in exchange for a card chargeable up to $500. This might seem like the proverbial money-from-one-pocket-to-the-other, but the key to this other “pocket” of income is that the secured money spent counts towards your score.
Other options available to rebuild credit include:
- Retail store cards
- ”Credit builder” loans
- Asking a friend or relative to cosign
- Becoming an “authorized user” on an existing card
Whenever you have someone cosign for a card or loan, remember to choose someone whom you can trust and who has, themselves, maintained good creditworthiness. Likewise becoming an “authorized user” should only be an option for accounts owned by someone you have direct access to and whom you feel you can trust. A breakdown in their creditworthiness is breakdown in yours.
Whatever option you find, it’s important to check that the company reports to the three bureaus that track scoring--Equifax, Experian, and TransUnion.
Keys to Managing Your Credit After a Bankrtupcy
