Contrary to popular belief, people can rebuild their credit within a few short years after filing bankruptcy - if they follow the appropriate steps. In fact, often times, post-bankruptcy debtors are more attractive borrowers than people who are drowning in debt.
In the case of a Chapter 7 bankruptcy, the debtor's unsecured debts would have been discharged. This frees up a lot of income for the potential borrower to borrow money in the future. For example, if the debtor previously had $30,000 of credit card debt, after bankruptcy, they would have none. A potential lender might prefer to loan money to that person now that they have a very low debt-to-income ratio compared to what they had before.
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The first step in rebuilding your credit after bankruptcy is to determine what conditions, situations or bad habits got you into the situation in the first place. Once you have determined what led you to financial turmoil, you want to adopt firm policy that can help you avoid it in the future.
The next step is to make a list of all your living expenses. You want to include your mortgage or rent, utilities, groceries, gasoline, insurance and any other monthly payments that you might have. In addition to monthly expenses, it's important to take into consideration what a reasonable amount of money would be to set aside for miscellaneous expenses such as clothing, dining out, diapers and other expenditures.
Once you have calculated where your money is going, you want to factor in what money is coming in. If you are earning more than you are spending, then great! If you are spending more than is going out, you will have to make adjustments in your budget. Some people have to curb their dining out expenses, or spend less on brand name items by buying generic instead.
If you can, it is very important to set aside some type of savings every month. This way, if there ever was an emergency, you wouldn't have to borrow against credit cards or have to use the rent money to pay an emergency veterinarian bill. An excellent start would be to save 10% of what you take home each pay check. This also gives you a nice cushion to save for a rainy day or towards your retirement.
Developing a solid budget and sticking to it is your first plan of defense when rebuilding your credit. After bankruptcy, it's also very important to make sure that you keep and maintain a steady job or source of income. Potential creditors like to see steady employment and a steady residence.
If you can stay in your home, it will make you more appealing to potential creditors in the future. Anything that promotes stability works towards your advantage. Now that you have a firm budget, and a steady job, you want to go out and apply for credit.
The first thing a lot of people want to do after filing bankruptcy is "wipe their hands clean" of credit. This however, is the wrong thing to do. Creditors are interested in your "recent" good credit. If they don't see any good credit on your credit report after bankruptcy, they will have nothing to rely on for a good credit reference. By establishing good credit, your credit score will begin to increase. When creditors look at your credit report, they will see that you are trying to amend your bad ways, by building good credit after your bankruptcy.
You can apply for a secured credit card, which is a type of credit card where you give the bank a deposit. Whatever your deposit amount is, will be your credit line. For example, if you give the bank a $500 deposit, your credit line will be $500. The bank will return your deposit after a specified amount of time, once you have proved that you can make timely payments.
You can also get a regular credit card. Be aware that you will not receive the lowest interest rates or the highest credit limit at first, but with regular use and a good payment record, your limits will most likely be increased over time and your eligibility for lower rates will improve. Keep in mind that it's very important that you pay off the balance every month and use the card at least every other month. It is also best to keep the balance low when you use the card so that it doesn't look like you are maxing out your credit cards every month. Be sure to shop out the rates, so you get the best offer available to you.
As long as you develop a strict budget and stick to it, put a little money away in savings each month and pay all of your bills on-time, you are well on your way to rebuilding your credit. It is always important to remember to live well within your means. If this means curbing spending or finding free activities to do with your children, your efforts will certainly help rebuild your credit standing! To learn more about rebuilding your credit after bankruptcy, you should consult with an experienced bankruptcy attorney who can help you tailor a plan, to fit your unique situation!
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