Life After Bankruptcy

Although bankruptcy is serious and is usually reserved as a last measure to resolve financial issues, it does not carry the same stigma that it used to. In fact, it is becoming easier to recover and qualify for credit. Even before the bankruptcy falls off your credit report; which is typically between 7 and 10 years. The severity of the bankruptcy listing lessens with time. Your credit status will improve even more quickly if you engage in responsible credit habits, like paying all of your bills on time, keeping your credit limits below 20%, etc.

Even though you may be timid to apply for and use credit, you need to show responsible use of credit to start rebuilding your credit report and score. Some creditors will extend credit to you right away, despite your recent bankruptcy. However, it will usually carry a very high interest rate. As long as you pay the minimum on time every time each month, you shouldn't have anything to worry about.

Get a secured card

If you can't qualify for a regular credit card, you should have no problem getting a secured card. With a secured card you deposit an amount of money, typically $200 to $500, and that becomes your credit line. You are using your own money as collateral because you are not credit worthy enough to borrow yet. Employ good habits like you would a regular credit card, such as staying below 30% of your limit and paying the balance in full every month. Doing this consecutively will build your credit and should earn you an upgraded card within a year.

Not all secured cards are created equal, so look for the following:

A reasonable annual fee and no application fee. Some secured cards tack huge upfront and annual charges onto their accounts. They do this because they know some customers can't qualify for traditional cards but are desperate to start building their credit. There are numerous secured cards that have reasonable fees, so keep looking until you find one that is affordable.
Reports to the major credit bureaus. Make sure the secured card reports to the three main bureaus: Equifax, Experian and TransUnion or you aren't doing your credit score any good. Call and ask if the card issuer regularly reports to all three before you apply.

Get an installment loan

The credit scoring formula will grade you on how you handle different types of accounts. And it's necessary to have a healthy mix of credit. In addition to revolving accounts, you should also have at least one installment loan. A small personal loan would be a good option, if you can qualify.

Another option is an auto loan. Just be prepared to pay extremely high interest rates. To make things less painful, try to make a big down payment and choose a loan that doesn't carry a prepayment penalty. That way, you can refinance the car to a lower interest rate once your credit improves.

Another possibility is a mortgage. With in as little as 6 months after filing bankruptcy you may be able to qualify for a high-rate loan. However, you're better off waiting until you can qualify for an FHA loan, which is usually within 2 years of filing. You have a good chance of qualifying as long as you've maintained responsible habits.

Just make sure you really can afford a home before you buy one. Many people wind up in bankruptcy court because they stretched too far to buy a house and can't keep up with all the attendant costs of homeownership.

Clean up your credit report

Don't assume everything is being reported accurately on your credit report. Many Bankruptcy filers find that several accounts are still listed as open and delinquent when they should be listed as "included in bankruptcy". It will be up to you to contact the bureaus and make sure they change the status of the incorrect listings. While you're at it, check for other mistakes that could be negatively affecting your score, and get those corrected as well.

Don't repeat the past

Hopefully you have learned from your mistakes and have resolved to make different choices. Although there are many people who choose not to change their spending habits and money management skills who file multiple bankruptcies, they shouldn't be emulated. There are severe consequences to these irresponsible behaviors which will eventually catch up with them.