In the long run, wise financial management after bankruptcy can actually improve your credit score
Filing for bankruptcy can actually be a very useful financial planning tool for people who are currently overwhelmed by debt. By allowing you to eliminate (Chapter 7) or restructure (Chapter 13) your debts, bankruptcy provides the breathing room you need to get your financial life back on track. Unfortunately, a bankruptcy proceeding will damage your credit score. The good news is that if you make an effort to follow optimal credit management practices after your bankruptcy, you could be looking at a credit score in the 700 range just 4 to 5 years after bankruptcy. Here are some guidelines for improving your credit score after bankruptcy.
Check Your Credit Reports
A month or two after your bankruptcy has been processed, you should check your credit reports to make sure all the discharged debts have been removed. For example, if you filed Chapter 7 and had all your credit card debts discharged, you should see a zero balance or a closed account notice beside each of those creditors. If you don’t, contact the creditor and the credit reporting agency immediately to remove those reporting errors and give yourself a clean slate.
Pay Your Bills on Time
Because your payment history makes up a significant portion of your credit score, paying your bills on time and in full is a simple and easy way to boost your credit score. Signing up for autopay or creating monthly reminders for yourself should help you stay on track.
Secure New Credit
While you might be tempted to go to a cash-only budget after bankruptcy, this won’t help your credit score. In order to begin raising your score, you need to get a new line of credit so you can start adding positive information to your credit history. You may need to start out with a secured credit card (backed by a deposit with the creditor). When getting a new credit card, be sure to keep your balance well below the limit as not utilizing all available credit will also help your credit score. In a year or two, consider applying for an auto loan. Your interest rate will be high on this first loan, but if you can successfully make the monthly payments it will improve your credit score and help you get lower rates in the future.
Save for Emergencies
Many people end up needing to file for bankruptcy because an unforeseen event like a medical emergency or extended period of unemployment has eaten up their savings and forced them to take on too much debt. In order to prevent this cycle from repeating, try to start saving for emergencies again. Create a budget that includes savings and live by it.
If you want to learn more about how bankruptcy will affect your credit score and how to recover from a bankruptcy, contact an experienced bankruptcy attorney.
